"Black Friday" - The Great Gold Crash...Of 1869

When one thinks of gold crashes, one typically visualizes a trading floor from the 1980s onward, predicated by Nixon's nixing of Bretton Woods 40 years ago, which removed gold from the list of accepted currencies and converted it into a government-manipulated pariah, whose core function was to be suppressed in an ongoing (failed) attempt to make the dollar the undisputed reserve currency (something even China comprehends). Well, readers may be surprised to discover that one of the first, and probably biggest on a relative basis, documented gold crashes was not 3 weeks ago, nor back in October 2008, nor any time since the advent of Nixon, or even the Federal Reserve, but over 140 years ago, on September 24, 1869 when a massive gold price manipulation scandal created a financial panic. That day, also known as "Black Friday", was the culmination of an attempt to corner the gold market following the latest, however brief, termination of the gold standard, when during the reconstruction period following the US Civil War, the US dollar was backed not by gold, but simply by credit (sound familiar). The result was a surge, and then collapse in gold.

What is the take home, if any? Perhaps that any time the government attempts to interfere with gold's status as a natural safety currency, it is not only gold price discovery that suffers, but virtually every other asset class, as central planning once again tries to order capital flows, however inefficiently, always, and without fail, leading to financial catastrophe.

The chart below demonstrates the intraday swing from that long ago Friday 142 years ago:

For those curious to learn about one of the first record gold price manipulations... and crashes, can do so below, courtesy of Wikipedia.

Black Friday, September 24, 1869 also known as the Fisk/Gould scandal, was a financial panic in the United States caused by two speculators’ efforts to corner the gold market on the New York Gold Exchange. It was one of several scandals that rocked the presidency of Ulysses S. Grant. During the reconstruction era after the American Civil War, the United States government issued a large amount of money that was backed by nothing but credit. After the war ended, people commonly believed that the U.S. Government would buy back the “greenbacks” with gold. In 1869, a group of speculators, headed by James Fisk and Jay Gould, sought to profit off this by cornering the gold market. Gould and Fisk first recruited Grant’s brother-in-law, a financier named Abel Corbin. They used Corbin to get close to Grant in social situations, where they would argue against government sale of gold, and Corbin would support their arguments. Corbin convinced Grant to appoint General Daniel Butterfield as assistant Treasurer of the United States. Butterfield agreed to tip the men off when the government intended to sell gold.

In the late summer of 1869, Gould began buying large amounts of gold. This caused prices to rise and stocks to plummet. After Grant realized what had happened, the federal government sold $4 million in gold. On September 20, 1869, Gould and Fisk started hoarding gold, driving the price higher. On September 24 the premium on a gold Double Eagle (representing 0.9675 troy ounces (30.09 g) of gold bullion at $20) was 30 percent higher than when Grant took office. But when the government gold hit the market, the premium plummeted within minutes. Investors scrambled to sell their holdings, and many of them, including Corbin, were ruined. Fisk and Gould escaped significant financial harm.

Subsequent Congressional investigation was chaired by James A. Garfield. The investigation was alleged on the one hand to have been limited because Virginia Corbin and First Lady Julia Grant were not permitted to testify. Garfield's biographer, Alan Peskin, however, maintains the investigation was quite thorough. Butterfield resigned from the U.S. Treasury. Henry Adams, who believed that President Ulysses S. Grant had tolerated, encouraged, and perhaps even participated in corruption and swindles, attacked Grant in an 1870 article entitled The New York Gold Conspiracy.

Although Grant was not directly involved in the scandal, his personal association with Gould and Fisk gave clout to their attempt to manipulate the gold market. Also, Grant's order to release gold in response to gold's rising price was itself a manipulation of the market. Grant had personally declined to listen to Gould's ambitious plan to corner the gold market, since the scheme was not announced publicly, but he could not be trusted. Gould had promoted the plan to Grant as a means to help farmers sell a bountiful 1869 wheat crop to Europe.

A highly fictionalized account of Fisk's life, culminating in a dramatic presentation of the gold corner, was shown in the 1937 film The Toast of New York.

Where does gold go from here - $1,500 or $2,000?

For the last week and more gold has been on a roller coaster moving between $100 and $200 each way until now where it is hovering above $1,800. A broad spectrum of analysts points either to $1,500 or above $2,000. With gold currently just above $1,800 we are around the half-way point for each move. The move each way would represent a move of just over 16%, which is not deeply significant in today's gold world except for the trading fraternity; there is more, however, beneath these moves than meets the eye!

$1500 Implications

• The fall to $1,500 is only 16%+and would therefore not represent a change of trend to us.
• Should the price only fall to $1,650 it would be a correction caused by significant selling in the face of rising seasonal demand.
• A fall to $1,750 would be large buyers standing back and shaking out weak holders, who are, primarily, holding gold in the U.S. based SPDR gold ETF. They sold 50 tonnes last week.

U.S. Involvement in the Gold Market

The holders that sold gold from that ETF could be one of two types. Either a holder who took advantage of the sudden jump over $1,910 sold into strength heavily, as part of an ongoing sales program, or a broad spectrum of U.S. sellers, believing that neither inflation nor deflation is a future danger for the U.S.

Either way, buyers outside the U.S. welcomed the supply and absorbed the amount quickly. This resulted in the fall from $1,910 to $1,716 and then a race back over the $1,800 line again. The significance is that the price correction/consolidation is a movement of U.S. long-term holder's gold into central bank of Eastern demand hands.

What has been remarkable in the gold price rise is that U.S. demand for physical gold has been negligible. Compared to the original growth in the U.S. gold ETF the demand this year and last year has been modest against the initial rises in the holdings.

The behavior of the holdings has reflected not just the conservative nature of the fund but some of the investment policies of the investors. Take the holdings of George Soros. After taking his position he has decided that deflation is not a danger and has dropped his physical holdings in favor of gold shares. The switch appears reasonable in the light of the poor performance of gold shares relative to gold itself and the reality is that he did not drop his exposure to gold at all. But he remains invested in gold. The amount of buying to sell for a profit in the medium term is small and is expected to remain so. At these levels it represents less that 1% of the total investment funds in the U.S. (more)