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Gold and the Global Financial Crisis of 2008

, , | May 29, 2019 | By

The financial crisis of 2008 shook the foundations of traditional finance. For the first time since the Great Depression, the future viability of the U.S. as a financial entity came into question. Corporate bankruptcies, government bailouts, and a global credit freeze prompted droves of everyday people to actively seek security. Almost intuitively, gold became a premier port in the storm.


Towards the end of 2007, it became apparent that the global economic system was under incredible strain. An environment of “toxic assets” had developed since the post-9/11 lending boom, exemplified by the popularity of subprime mortgages. While the writing of a huge amount of new consumer debt initially fueled economic growth and corporate earnings, the construct began to unravel in late-2008.

In one of the largest bankruptcies of all time, the century-old Lehman Brothers filed for Chapter 11 protection on Monday, September 15, 2008. The global investment bank’s filing turned Wall Street on its collective head, prompting an immediate 500-point session crash in the Dow Jones Industrial Average (DJIA). This was the beginning of a major correction in the U.S. equities markets, one that erased more than 50% of the DJIA’s value in 18 months.

As the stock market turbulence persisted, traders and investors ran for the hills. Valuations of safe-haven assets across the board spiked, led by gains in gold and U.S. Treasurys. Until the institution of multiple quantitative easing (QE) stimulus programs, market instability was almost a daily rule.

Gold Leads the Safe Havens

With real estate, equities, and commodities markets under tremendous bearish pressure, billions of dollars began a mass migration into safe-haven assets. Over the course of the financial crisis ― primarily 2007 to 2012 ― perhaps the most consistent winner was gold. Here is a quick look at gold’s annual performance during this period:

Year Percent Gained Closing Price
2007 +27.61% $836.50
2008 +8.29% $869.75
2009 +25.04% $1,087.50
2010 +29.24% $1,420.25
2011 +8.93% $1,531.00
2012 +8.26% $1,664.00

As the financial heat became unbearable, investors, businesses, banks, and even the public piled into bullion. For the five-year period that encompassed the financial crisis, gold very nearly doubled in value, rallying from just above $825 to north of $1650 per ounce.

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The primary reason behind the exodus to gold was a broad uneasiness facing asset prices across the board. In addition, these fundamental market drivers served as the underpinnings of gold’s value during the crisis:

  • Lending freeze: The limited availability of credit was not relegated to individual borrowers. As angst spread through the financial community, banks of all kinds elected to hold gold instead of pursuing investment via standard interbank lending practices.
  • Ag commodity slump: Reduced demand for ethanol, exports, and decreasing overall consumption drove ag pricing down. Subsequently, gold became attractive as recession hindered any potential returns on ag commodities.
  • Quantitative easing (QE): From 2008 to 2012, the U.S. Federal Reserve (Fed) enacted an aggressive QE plan. In an attempt to stimulate economic growth, the Fed adopted a near-zero Federal Funds Target Rate while buying trillions in government bonds and mortgage-backed securities. As a result of QE, gold became a popular hedge against the perceived devaluation of the U.S. dollar.

In a variety of ways, buying gold or related derivative products insulates the holder from financial risk. The negative influences of currency devaluation, depressed commodity prices, or illiquid credit markets may be effectively limited. Due to its versatility as a hedging mechanism, gold is a go-to asset during trying financial times.

Getting Started with Gold

While stockpiling physical gold is one way of capitalizing on its benefits as a safe haven, trading related futures and options products also offer many advantages. For more information on all things gold, a free consultation with a broker at StoneX is a great way to get started.

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