Black Friday: The 1869 Gold Panic

Black Friday. These words have become synonymous with amazing deals, long lines, and cut-throat shopping, but in 1869, those words conjured up a different vision. Gold’s Black Friday, September 24, 1869, saw the collapse of the U.S. gold market, as unscrupulous financiers, and large federal debt converged together to create the perfect situation for an attempt to corner the gold market.

It’s 1869. The Civil War had recently ended, and the Reconstruction Era was underway, as Ulysses S. Grant, renowned war hero, became the 18th President of the United States. He inherited a deeply divided nation, with large federal debt. In his inaugural address in January 1869, Grant demonstrated his commitment to gold-backed currency by insisting on repaying the war bond debt from the Civil War with gold. Greenbacks (paper dollars), which had been introduced to fund the Union march to war in 1961, represented the first issue of a federal paper currency since the collapse of the Continental Currency of the late 18th century. These notes, which were originally intended to be temporary and to be recalled following the war, had more than $450 million worth in circulation. Due to hard times of 1867, particularly by western farmers, demands were made for an inflated currency through the creation of more greenbacks. A compromise was finally reached in 1869, whereby greenbacks to the amount of $356 million were left in circulation. Grant tried to improve the economy by reducing the supply of greenbacks, or paper dollars by using gold to buy dollars from citizens at a discount and replacing them with currency backed by gold. This effectively set the value of gold: when the government sold its supply, the price went down; when it didn’t, the price would go up.

Jay Gould

Jay Gould



Enter Gould and Fisk. Jay Gould and Jim Fisk had a reputation for being two of Wall Street’s most ruthless financial masterminds. The two men, president and vice president of the Erie Railroad respectively, where known, among a slew of other misdeeds, for having issued fraudulent stocks, bribing politicians and judges, and maintaining a relationship with Tammany Hall’s William “Boss” Tweed. Beginning in early 1869, Gould, coupled with partner in crime, Fisk, began an ambitious campaign to conquer the gold market. Gould wagered that, because there was only around $20 million of gold in circulation at a given time, a speculator could potentially buy large portions of gold, and corner the market. From there, the price of gold could be driven up, and then sold for a hefty profit. Grant could simply order the Treasury to sell off large amounts of gold to drive prices back down, so for this ambitious gold scheme to work, Gould needed to manipulate the President of the United States.

Jim Fisk

Jim Fisk

An insider was needed. Abel Rathbone Corbin became the perfect partner-in-crime; a former Washington bureaucratic, and married to Grant’s sister, Virginia. In the spring of 1869, Corbin was befriended by Gould, and persuaded to help. $1.5 million in gold made its way into an account with Corbin’s name, and the conspiracy began. Corbin recruited Daniel Butterfield, who he helped install as the U.S sub-treasurer in New York. Butterfield was responsible for handling the government’s gold sales, and he agreed to give Gould, Fisk, and Corbin information of when the government was going to sell gold. Butterfield was given a $1.5 million stake in the scheme, and a $10,000 loan. The players were in place.

The deceit is on. Corbin began by playing up his family connections, often arranging meetings where Gould, Fisk and Grant would be present. The conspirators would use these occasions to talk about government money policy, with Corbin backing them in these discussions. The financiers argued against the government sale of gold, and tried to persuade Grant that high gold prices would benefit farmers. By raising the gold prices, greenbacks would be devalued, making U.S crops cheaper abroad, leading to boosted exports. President Grant remained cordial, but tight-lipped, around Gould and Fisk, but apparently, their plan worked. Grant confided in Corbin that he had changed his mind, and the treasury was going to be told not to sell gold for over the next month.
The buying begins. Gould, along with co-conspirators, had been secretly stockpiling gold since August. By September 16, they had nearly $10 million (2/3 of the total market) in gold. But when they became privy to the policy change, they began to acquire gold at an accelerated rate. Starting on September 20, hiding behind an army of brokers, they began to buy all the gold they could get their hands on. Just as planned, the gold price went higher, rising by 20%. At this point, Grant became suspicious of Corbin’s interest in gold, and asked his wife, Julia Grant, to write a letter to his sister, Virginia. She informed her that the president was “very much annoyed by your speculations. You must close them as quick as you can.” Corbin informed Gould of this new development, but Gould didn’t divulge the information to his partner, Fisk. On the evening of September 23, President Grant communicated with Secretary Boutwell, head of Treasury, and made the decision to sell $4 million in gold. Butterfield caught wind of the plan, and informed Gould of the new developments, but again, Gould didn’t tell Fisk. On Friday, September 24, at market’s open, Fisk was still buying gold. Gold opened at $145 but quickly spiked to $160, bringing the price of an ounce of gold to more than $30 above what it was when Grant took office.

The "Boy of the period" stirring up the animals, 1869. Print shows a caricature of financier Jay Gould, left, who attempts to corner the gold market, represented by bulls and bears in a cage. Credit: Library of Congress

The “Boy of the period” stirring up the animals, 1869. Print shows a caricature of financier Jay Gould, left, who attempts to corner the gold market, represented by bulls and bears in a cage. Credit: Library of Congress

Panic ensues. At about noon, on the fated “Black Friday”, word got out that the Treasury had sold $4 million in gold. Within minutes, the inflated gold prices plummeted from $160 to $133. Many investors had purchased gold on margin, and others had been locked into purchase contracts. When the price fell, other commodity prices destabilized, foreign trade was nearly halted, and investors faced financial ruin. The stock market fell 20%, and by some reports, 50 Wall St brokerages collapsed, and another 150 were insolvent. Gould, having been aware of the impending Treasury sale, was selling quicker than Fisk was buying before the collapse. Their holdings were sold, netting them around $15 million.
The aftermath. It was very chaotic after Black Friday, and the results were felt for years. To protect themselves, Gould paid off William “Boss” Tweed, along with some New York judges, delaying settlements of unfavorable trades. Multiple allegations of malfeasance and an official investigation by Congress proved fruitless. Fisk, who had bought gold contracts on behalf of other investors, simply reneged on the deals. Ultimately, they were able to keep the illicit earnings. Neither man ever spent a day in jail. But not everyone left unscathed. Corbin lost big on that day, and Butterfield was removed from his post. Ulysses S. Grant spent the rest of the term with the shadow of Black Friday hanging over him.
Black Friday. September 24, 1869, a historical day for gold prices, brought about by the conniving of ruthless and greedy men.

[1] http://www.sciencedirect.com/science/article/pii/0014498375900133

http://www.nytimes.com/learning/general/onthisday/harp/1016.html

http://www.history.com/news/the-black-friday-gold-scandal-145-years-ago

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Gold Investments: Physical vs ETFs

Gold is attractive. It has drawn the worship of the Incas, hundreds have flocked to uncharted territory to mine the shiny flakes, kings and queens have gilded their homes, and it has acted as a form of currency since 1500 BC. This allure and desire for gold has not been lost. This yellow metal is still widely used in jewelry, electronics and computers, dentistry, medicine, and as a monetary and financial staple. Gold is quite rare, and as such, it is highly valuable. Gold has found its place as a worthwhile investment. There are many reasons to invest in gold. Gold acts as a hedge against the stock market. It protects against inflation and deflation, and the printing of currency. It is a safe-haven during times of political and economic uncertainty.  The gold market is highly liquid and there are many ways in which investors can gain exposure to this precious metal, including holding physical gold (i.e., gold coins and bars) and exchange traded funds (ETFs).

goldPhysically owning gold offers many benefits over investing in a gold ETF.  Gold ETFs, consisting of the one principal asset, track and reflect the price of gold. While the assets in the fund are backed by the commodity, the intent is not for an investor to own gold. A gold ETF only gives an investor an opportunity to gain exposure to the performance of gold, but this means that you end up with a position. It becomes a number that you trade into and out of based on extraneous factors that may or may not influence the underlying price.  You don’t have the tangible asset in your hands. There are some ETFs that are backed by physical gold, but for most you cannot redeem or sell shares in exchange for gold. For ETFs that allow you to take delivery of physical gold, the requirements are quite steep. For one of the top ETFs, you must own at least 100,000 shares, and the delivery will be in 400 ounce bars, and the fund retains the right to settle in cash for any reason they deem necessary. 400 ounce bars equal about $480k each at $1200 gold, and this is beyond the reach of all but the most successful individual investors. ETFs are part of the stock market, which invalidate using a gold ETF as a hedge or safe-haven from the market. If the stock market goes south, all your paper investments will become just that – paper.

Buying physical gold offers investors many protections. Physical gold will always have its intrinsic value. Physical gold provides the most direct exposure to gold. Gold in bulk form is referred to as bullion, and it can be cast into bars or minted into coins. Gold bullion’s value is based on its mass and purity rather than by a monetary face value. Even if a gold coin is issued with a monetary face value, its market value is tied to the value of its fine gold content. Physical possession of gold helps mitigate the real fears of financial institutions’ scandal and wrong-doing. Holding the paper proxy for gold has risks as you rely on a third-party; bad management, regulatory oversight, lack of safeguards, and operational integrity can all be compromised. While unsubstantiated, skeptics have even raised doubts over the management of physical gold for funds, with questions over how much physical gold bullion is actually held[i]. For some investors, gold is appreciated as the perfect investment in the event of massive economic hardship. If you own physical gold, it can be relatively easy to carry it around, is easily liquidated anywhere in the world, and can even be used as currency in many situations.

There are costs associated with investing in gold. With a gold ETF, an investor will lose a percentage of his or her investment’s value each year to the fund’s expense ratio, which is the recurring annual fee charged by funds to cover its management expenses and administrative costs. There will also be the commission for buying and selling an ETF, and an active trader can easily rack up high costs. For physical gold, there are three principle costs, including storage, insurance, and transportation. For insurance, the cost is dependent on the volume of gold you own, but for storage and transportation the costs are less influenced by minor changes in volume. If you are buying gold long term, in large volumes, and you plan to keep on adding to that volume in good quantities, both storage and transportation costs will go down on a per unit basis. Conversely, ETF management fees are dependent on volume/value. For privately stored physical gold, there are low to no reporting requirements, though capital gains tax will need to be paid if you sell. However, taxes, security and holding costs aside, for a long-term investor looking for a hedge to the portfolio, physical gold is the ultimate solution.

[i] http://www.forbes.com/sites/afontevecchia/2011/11/15/is-gld-really-as-good-as-gold/#757d0a533ca1

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Trump’s Shining Victory: How will gold fare?

The dust has started to settle since the news of Donald Trump’s win, and it is time to explore what this will mean for the future of gold. The presidential office is one of the highest, most respected seats a person can hold, giving power and influence, and shaping the laws and policies of the country. In the aftermath of the US election surprise, gold prices have been in a significant retreat as the US dollar has surged, global equity markets have stabilized and strengthened, and interest rates are increasingly expected to rise.

The United States Presidential election has had a very big influence on gold. Before the election, it was predicted that, while a win from either candidate would benefit gold prices, for Donald Trump, the results would be more extreme. A Trump win was seen to be politically and economically disruptive, leading to fear, and a more volatile market. And while the markets did react strongly to the new president-elect, it was not nearly as striking as expected. On election day, gold prices surged from below $1,280 an ounce to more than $1,337 an ounce at one point. Gold futures had their heaviest-ever trading day on Wednesday as investors rushed to safe-havens. More than 780,000 gold futures changed hands in the wake of the news. It seemed that the suppositions surrounding Trump and the market was correct, until things began to shift again. Gold futures for December delivery reversed course late Wednesday to settle slightly lower at US $1,273.50 an ounce on the New York Comex on Thursday. In his victory speech, Trump proposed a “$1 trillion over a 10-year period” infrastructure plan, which has already boosted the price of metals in the last week.[i] Gold futures pared much of their earlier losses on Monday following their biggest weekly lashing in over three years, but prices still finished at their lowest levels in more than five months. Gold futures for December delivery GCZ6, +0.35% fell by $2.60, or 0.2%, to settle at $1,221.70 an ounce.

Trump’s economic policies have left many investors unsure for the future due to his lack of political experience, lack of clarity as to what parts of his platform would be pursued, and unknown political appointments for his Cabinet. Trump ran on an economic platform that supports cutting corporate taxes, repatriating money from abroad and massive infrastructure spending. This would suggest a more inflationary environment that would be supportive to gold and other precious metals. A bond-market gauge on Thursday hit its highest level since the summer of 2015. The 10-year break-even inflation rate indicated expected annual inflation of 1.89% over the next 10 years. That measure, reflecting the gap in yields between Treasuries and their inflation-protected counterparts, known as TIPS, was 1.73% following the election.[ii] On Monday, the yield on the 10-year Treasury note rose to 2.29%, its highest since the beginning of the year. The 30-year yield increased as much as 13 basis points to 3.06 percent.

Trump’s victory had initially cut expectations that the Federal Reserve would raise interest rates in December.  The Fed meeting, taking place December 13th and 14th, is now getting higher predictions of a rate change. The dollar has advanced amid rising inflation expectations in the wake of Trump’s election win and strengthening predictions for a Federal Reserve interest-rate increase next month. The dollar index, which measures the dollar against a basket of major currencies, fell 0.18 percent to 98.607 on Friday.[iii] On Monday, the U.S dollar climbed against foreign currencies. The U.S. Dollar Index rose 1.1% earlier in the session, hitting its best level since November 2015. The U.S. dollar rose 1.3% against the euro, 1% against the British pound, and 1.6% against the Japanese yen. Gold prices fell as the U.S. dollar climbed. Trump has spoken out against the Federal Reserve, and their policy of holding interest rates near zero, and this could be indicative of a monetary policy shift. Gold is highly sensitive to rising rates. Higher rates lift the opportunity cost of holding non-yielding assets, such as bullion, while supporting the dollar, in which it is priced.  Trump has expressed interest in the return to the gold standard, which would tie the U.S. dollar to bullion as a hedge against inflation. While this may have just been a campaign stance, it would greatly affect the price of gold if it were to be instituted.

Trump’s foreign policy will be greatly influential in gold pricing. There are several speculations pertaining to the impact of U.S relationships with Mexico, China, and Russia. Trump has been a staunch critic of global trade deals. He has labeled China as a currency manipulator, and he has spoken to policy that could break down long-standing geopolitical relationships throughout Asia. Trump has campaigned on limiting Mexican imports. After Trump’s win, the Mexico peso experienced losses, with a fresh record low over 21 pesos per dollar, and some forecasting further declines.[iv] On Sunday, Trump backed away from his promise to erect a border wall, saying some areas could instead be “fencing”.[v] In wake of the softening stance, Mexico’s peso jumped as much as 1.1 percent Monday.

With almost two months until the 45th United States President is sworn in, there is going to be a lot of speculation. Gold prices will be seen to reflect the sentiments and fears of investors. There is a good possibility that Trump’s victory, and his impending time in office will spark demand for physical gold. So far this year, physical gold demand has disappointed. Earlier in the week, the World Gold Council reported that gold demand dropped by 10% to 992.8 tons in the third quarter of 2016. Predictions have reported that a hit to risk sentiment and fears over free-trade deals would drive gold higher in the coming months, with the price hitting $1,400 or even $1,500. Only time will tell.

[i] http://www.cnbc.com/2016/11/15/gold-set-to-get-a-boost-as-president-elect-donald-trumps-spending-plans-fuel-inflation.html
[ii] http://www.wsj.com/articles/donald-trumps-win-fuels-bets-on-inflation-1478821303
[iii] http://www.bloomberg.com/news/articles/2016-11-08/gold-holds-drop-with-investors-on-tenterhooks-before-vote-result
[iv] http://www.nytimes.com/2016/11/10/business/dealbook/mexico-peso-dollar-election-trump.html?_r=0
[v] http://www.reuters.com/article/us-mexico-peso-idUSKBN1380V5

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