The Crash That Changed Wall Street Forever

Last week, we took a deep dive into the eerie Friday the 13th Mini Crash. This week, we’re rewinding a few years earlier to a day that sent shockwaves around the globe: Black Monday on October 19, 1987…

But before we delve into that, let’s catch up on today’s news… 

A New Surge in U.S. Treasury Yields — The 10-year US Treasury note climbed above 4.9% for the first time since 2007, while the 30-year offering reached 5.05%, also a 16-year peak. Experts say they could climb higher…

Dire Warning from JP Morgan CEO Jamie Dimon — “The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships,” Dimon said in a statement accompanying the Q3 earnings report. “This may be the most dangerous time the world has seen in decades.”

Gold Up Over 7.5% Amidst Middle East Conflict — Gold prices edged higher this week as investors took stock of developments in the Middle East and awaited Federal Reserve Chair Jerome Powell’s speech later this week for more cues on the U.S. interest rate path.

Billionaire Ray Dalio Predicts Return of Money-Printing Spree — During an interview with Fox News, renowned billionaire investor Ray Dalio explains how the Federal Reserve is continuing to lose money as it keeps interest rates higher for longer. Dalio reasons the Fed will eventually have to resort to extreme money printing to cover those losses.

64% of Americans Would Welcome Recession if it Meant Lower Mortgage Rates — The picture is grim for new homebuyers. In fact, 64% of Americans say they are “ready for a recession” if they are better able to afford to buy a home, according to a study conducted by Harris Poll.

Friday the 13th – Terror on Wall Street

It was the late eighties and Friday the 13th was fast approaching – however, instead of the typical spooky tales of ghosts and goblins, October 13, 1989, brought a different kind of terror to Wall Street.

Seemingly out of nowhere, the Dow Jones Industrial Average (DJIA) dropped a chilling 6.91% – which was the second-largest one-day percentage drop (at the time) in market history. This day became known by some as “Black Friday” around the stock market.

So, what spooked the market?  

The crash was triggered by the collapse of a $6.75 billion leveraged buyout deal for UAL Corporation, the parent company of United Airlines. When this deal unraveled, it sent shockwaves through the financial world, leading to a massive collapse of the junk bond market.

In the simplest terms, junk bonds are high-risk, high-reward bonds. Throughout the 1980s, the market for these bonds exploded, growing from $10 billion in 1979 to a whopping $189 billion by 1989, an increase of 34% annually.  

Initially, junk bonds were tied to companies that once had solid reputations but had hit hard times, causing their credit ratings to drop. But by the 1980s, these bonds weren’t just for struggling companies. They became popular tools for big financial moves like leveraged buyouts and mergers.

This trend snowballed, and soon, many businesses were using junk bonds for various financial needs. But as with any trend that grows too big too fast, it became a bubble. And on that fateful Friday, the bubble burst.

Black Monday – When Wall Street Went Dark

This week we’re examining a day that sent shockwaves around the globe: Black Monday on October 19, 1987.

On this fateful day, 36 years ago, the Dow Jones Industrial Average took a nosedive, plummeting an astonishing 22.6%. Which remains the largest one-day crash in history.

So, what led up to this crash?

The Markets Before the Crash

The mid-80s saw stock markets soaring. From August 1982 to August 1987, the DJIA surged from 776 to a peak of 2,722. By August 1987, it had rocketed up by 44% in just seven months. The euphoria was palpable, but beneath the surface, whispers of a bursting bubble grew louder.

By mid-October, a series of unsettling news reports begin to shake investor confidence. The U.S. government reveals a trade deficit that’s larger than anyone expected, and the dollar’s value took a big hit.  

All of this at once was too much and the markets began to falter, hinting at the chaos that’s about to unfold. Then, on October 16, amidst this turmoil, we hit “triple witching” – a day when stock options, stock index futures, and stock index options all expire on the same day.  

Triple witching days can see increased trading activity as traders close, roll out, or offset their expiring positions, particularly in the final hour of trading. This can often lead to increased volatility in the markets. The stage was set for Black Monday.

Black Monday: The Day Darkness Descended

On Black Monday, a combination of automated trading systems, panic selling, and global contagion led to a market meltdown. It was like watching dominos topple, but on a global scale. The world watched in horror as stock markets crashed everywhere.

As the bloodbath in stocks occurred on Black Monday, gold initially climbed $19.90, or 4.2%, to a high for the day of $491.50. But then the metal turned south and settled at $481.70 and the next day slid to $463.20, which was a loss of $28.30, or 5.8%, from Monday’s peak.

It turns out that people were busy liquidating anything, including gold, to raise cash. During any crisis, there is a chance that gold goes down for this very reason.  

But historically gold has a strong track record of performing well after a crisis. The following graph shows the nine biggest crashes in the S&P 500 since the mid-1970s, when the “gold window” was closed and the price was no longer pegged to the U.S. dollar.

Recovery: The Post-Crash Landscape

Post Black Monday, there was a scramble to ensure such a catastrophe wouldn’t repeat. Regulators revamped trading protocols and introduced “circuit breakers” to pause trading during extreme market dips, giving investors a breather and a chance to regroup.

Interestingly, while the markets were in chaos, the Federal Reserve and other central banks jumped into action. Thanks to their intervention, the Dow bounced back from its 22% drop relatively quickly.

As Black Monday shows, gold won’t automatically rise with every downtick in the stock market. Sometimes during the chaos, investors may need to sell whatever assets they have, including gold, for cash.  

Yet, history has consistently shown gold’s resilience as a safe haven during crises. While many view gold merely as a hedge, its potential as a robust asset during prosperous times is often overlooked.

Many people think of gold only has a hedge and underestimate gold’s power as an asset during good times. Since the U.S. departed from the Bretton Woods system and the gold standard in the early 1970s, gold has appreciated roughly 50-fold.

Moreover, since 2000, gold is quietly up over 500%, outshining popular assets like stocks, bonds, and real estate by a wide margin.

Your Path to Financial Stability Starts with Gold

In the ever-shifting landscape of global finance, gold remains a beacon of stability. Let us help you harness its enduring value.  

If you’ve yet to include gold in your investment portfolio, consider this your wake-up call. If you don’t secure your financial future with real assets, no one else will.

And for those already invested in gold, remember: we’re here to assist you in expanding and optimizing your holdings.  

Don’t wait for the next market shakeup. Secure your financial future with gold today.

ADD GOLD TO YOUR PORTFOLIO TODAY

Next week, we’ll be back to discuss gold’s role during the Great Crash of 1929 and the Great Depression.

Until next time!

Best,
Brandon S.
GoldSilver

P.S. A quick note of clarification from our last issue: In our previous discussion about gold’s price, we referenced inflation-adjusted figures. For transparency and clarity, here are the actual gold price numbers from that period:

On September 1, 1989, gold was priced at $359.40 per ounce. Fast forward to December, and it glittered at $413.85 per ounce, marking an impressive 15% rise in just three months.