Gold prices surged to their largest one-day dollar gain in history as investors sought a safe haven from a "great unwinding" on North American stock markets, brought on by the rapid implosion of financial stalwarts such as Lehman Brothers Holdings Inc. and American International Group Inc.
"This cataclysmic period will bring about drastic changes to the financial sector," said Louis Gagnon, a finance professor at Queen's University in Kingston, Ont. "I think it is fair to say that the world of finance as we know it will never be the same again. I just hope that we will learn from these mistakes and that the new paradigm that will replace the current one will be better and more durable."
Gold for December delivery jumped up to $90.40 (U.S.) an ounce in after-hours trading Tuesday, or 11.6 per cent, to $870.90 an ounce. The metal closed up $70 to $850.50 in the regular session.
On the stock markets, meanwhile, the Dow Jones industrial average plummeted 4 per cent, or 447 points, to 10,609 while the broader S&P 500 dipped 4.7 per cent to 1,156. The S&P/TSX Closed down 2.8 per cent, or 349 points, to 11,877.
The past two weeks have seen the U.S. government take over lenders Freddie Mac and Fannie Mae to protect $5-trillion (U.S.) in mortgages, the bankruptcy of Lehman Brothers and the rapid sale of Merrill Lynch & Co. Inc. On Tuesday, the U.S. government said it would lend AIG $85-billion, a bailout that will leave taxpayers holding a 79.9-per-cent stake in one of the world's largest insurers.
"There is no surprise that people try to draw parallels with the stock market crash of 1929, because we haven't had episodes of such challenging uncertainty in our lifetime," Mr. Gagnon said. "What we are watching is everything falling apart in slow motion."
With so many large firms failing or faltering, Mr. Gagnon said everyone is anxiously waiting to see what happens next. Now, attention has turned to investment banks Goldman Sachs Group Inc. and Morgan Stanley.
Goldman shares plunged 13 per cent Wednesday, while Morgan Stanley fell 24 per cent.
"I am absolutely certain we have not seen the end of it, many more shoes are waiting to drop," Mr. Gagnon said. "What worries me much more than anything else is the rumour mill - there are simply too many rumours out there. Everyone is going native, everyone is in a state of panic. I talk to a lot of people in Canada, in New York, in London and never in my career have I heard panic like this in their voices."
Investors are liquidating whatever they can in a bid to protect their assets, said Ken McCord, chief executive officer of Webb Asset Management in Toronto.
"Fundamentals or any other methods that might be used to measure the market have been thrown out the window," Mr. McCord said. "This is mass liquidation on a scale I've never seen before. What's going on is a great unwinding of highly leveraged accounts."
The situation isn't expected to improve in the United States until the housing market begins to show strength, and economic figures released Wednesday did little to assuage fear. The Commerce Department reported that new home construction fell by 6.2 per cent in August to an annualized 895,000 units, the slowest month since January, 1991.
"The report highlights the distress that the U.S. housing market continues to face," TD Securities economy strategist Millan Mulraine commented. "However, with the rescue of [Freddie and Fannie]appearing to have provided some semblance of normalcy in the U.S. mortgage insurance and securitization business, there is perhaps the possibility that these dramatic declines in the past few months may not continue indefinitely."
In Toronto, Nortel Networks Corp. shares plunged 50 per cent after it cut its business outlook and said it would look for more cutbacks and asset sales to deal with lower revenues. Shares of insurer Manulife Financial Corp. slipped 5 per cent after it said it had $800-million in exposure to Lehman Brothers, AIG and troubled Washington Mutual.
The mining sector was the only subindex showing a gain, up 3 per cent. Gold producers surged, with Barrick Gold Corp. up 13 per cent and Goldcorp Inc. gaining 10 per cent.
"While equity markets decide whether they want to break down or rebound, commodity markets have been soaring today," CMC Markets analyst Colin Cieszynski wrote in a note to clients. "Gains have been led by the precious metals, with gold and silver both gaining over 7 per cent. This suggests that, as occurred back in March, with concerns over the health of the banking system, the traditional roles of gold and silver as financial instruments in times of crisis appear to be dominating trading once again."
Oil, meanwhile, surged more than $6 to $97.16 a barrel on the New York Mercantile Exchange.