Jerome Smith’s message made Herbert Hunt smile. He knew that Bunker had considered gold to hedge against inflation, even though Americans still could not legally invest in the yellow metal, but had rejected it as “too political” and “too easily manipulated” by outside forces.76 Central banks throughout the world had substantial gold reserves they could dump on world markets to make a profit, dampening price increases. Smith confirmed the superiority of silver because the upward price pressure would be free of government influence. The white metal would outperform the yellow going forward, according to Jerome Smith, but he raised two red flags that caught Herbert’s attention. He reminded readers that the government had confiscated silver bullion from American citizens in 1934 at the arbitrary price of 50¢ an ounce and suggested it could happen again: “In the U.S. there is a lack of freedom, a complete absence of privacy, and little safety for investors who hold their investments (especially silver) in the U.S.”77 He suggested storing silver in a Swiss bank because “there is a maximum of freedom, complete privacy, and a very high level of safety for investors.” Herbert knew that Smith’s suspicion of the U.S. government paled compared with Bunker’s mistrust, so he would recommend they rent Switzerland as a big safe deposit box. But Herbert had trouble with Smith’s second warning.
Jerome Smith did not like the Commodity Exchange. He began by saying, “Silver futures markets are a way of speculating in silver, not of investing in silver. Prices for future delivery are more volatile than bullion prices—the most distant months being most volatile.”78 Smith referred to Comex silver as a “paper market” because few buyers took delivery of the underlying metal, which meant that trading volume could far exceed the physical supply of bullion. He added that “this is a market for full time professional traders and floor brokers seeking short-term trading profits” and warned that a floor broker will “try to persuade you to buy and sell on short term price movements.” He suggested ignoring Comex and using your favorite Swiss bank both as broker and for storage.
Smith was right about speculators trading on the Commodity Exchange and that trading volume surpassed physical supplies, but Bunker and Herbert had no alternative for the Hunt-size accumulation they had in mind. Comex was the most liquid market in the world in part because short-term traders attracted large orders from around the globe, producing a competitive price. Handy & Harman had switched to Comex for bullion quotes and Eastman Kodak used Comex to hedge their physical silver exposure. Speculators had replaced government bureaucrats in determining silver prices after the U.S. Treasury stopped wholesaling the white metal to industry. There was no escape, not even for the Swiss bankers who watched Comex for price discovery just like everyone else. Herbert designed a modified blueprint for accumulating silver on the Commodity Exchange, a buying program that nearly destroyed Henry Jarecki.
CHAPTER 16
* * *
HEAVYWEIGHT FIGHT
BUNKER AND HERBERT HUNT HAD 2,000 DECEMBER FUTURES contracts in their brokerage accounts on Monday, December 3, 1973, each contract conferring the right to take delivery of 10,000 ounces of silver, for a total of 20 million ounces of the white metal, the same amount that all of French industry consumed the year before.1 During November Bunker’s favorite floor broker on Comex, Alvin Brodsky, had purchased those contracts for the Hunts by lifting offers from willing sellers at prices ranging from $2.79 to 2.96 per ounce. On December 3 the price of silver stood at $3.04, so the Hunt brothers had a paper profit of more than three million dollars.2 Any other speculator would have sold those contracts and taken the money to the bank rather than pay for the underlying bullion as required during the so-called delivery month, when December futures contracts expire. But not the Hunts, who wanted profits together with the underlying metal and considered their December holdings like an appetizer at a Texas barbecue. Bunker and Herbert remained in the background while brokerage firms like Bache & Company took delivery of the 20 million ounces on their behalf, paying the full $60 million as required.3 The tactic made headlines.
On Wednesday, December 12 the business and financial correspondent of the Christian Science Monitor raised the question, “Who’s trying to corner the market in silver?” and speculated that Bache had been instructed to pay for the metal by “Bunker Hunt, son of H.L. Hunt, Texas billionaire.”4 The word “corner” in the headline refers to when buyers of futures contracts accumulate the underlying commodity to prevent sellers of futures from delivering as required. It is sometimes called a squeeze, with the longs (buyers) squeezing the shorts (sellers) into a corner. If the shorts are forced to buy back their contracts at artificially high prices, it is called manipulation. Proving manipulation, however, requires demonstrating intent and suffers the same ambiguity as pornography, with an equally long history in commercial intercourse that gets resolved only in court. The press quoted Charles Stahl, publisher of Green’s Commodity Market Comments, who claimed that Bache had acted for Bunker Hunt, saying that he noticed buying of the “nearby December” contract on Comex about a month ago, but he doubted a manipulative squeeze, adding, “Mr. Hunt is buying the silver as an investment, not as a speculation.” Stahl was right but after a repeat performance by Bunker in February 1974, Congress took notice.
On Monday, February 11, 1974, Barron’s newspaper, an influential financial weekly, reported that Bunker Hunt had recently bought 2,700 futures contracts giving him rights to 27 million ounces of silver over the next four months and suggested he was “willing to accept delivery of the bullion, an unusual stance.”5 The cash price of the white metal had jumped to a new world record, $5.37 per ounce on February 11, bringing the Hunt profit on the original 20 million ounces to $50 million, making even Bunker smile while reading the racing results.6 Comex silver traders had learned to watch Alvin Brodsky, short in stature but with the clout of a giant, thanks to his Texas clients. The press described the action: “Each morning … just prior to the 10 o’clock bell that signals the opening of business in silver futures … traders’ eyes flick almost involuntarily in the direction of Irv Brodsky [sic] … Is he buying or selling, the smart ones ask. When Brodsky buys, then they buy.” Barron’s offered this adult version of follow-the-leader as “one way to explain the incredible rise in the price of silver” and suggested that “Hunt would be the biggest single silver winner in recorded history” if he could realize a similar profit on his new contracts.
Silver prices rose following the Barron’s article, reaching $6.70 an ounce on Tuesday, February 26, the highest level to date and marking a speculative frenzy that more than doubled prices since the beginning of December.7 Some blamed the Hunts for the price bubble but even their massive purchases of almost 50 million ounces would have caused just a temporary boom, like a summer thunderstorm that quickly dissipates, without strong underlying fundamentals.8 Barron’s explained that the “Brodsky-Hunt Theory … is only one minor influence on silver’s price” and listed fundamental forces driving up demand for the white metal, including runaway inflation, the Arab oil embargo following the October 1973 Yom Kippur War, silver’s demand-supply imbalance, and the strength of gold.9 The New York Times reported that “record prices for gold in Europe contributed to new highs in silver futures,” which may have been true, although gold had risen from $100 to $175 since early December while silver eclipsed that rate of increase by jumping from $3.04 to $6.70.10 Silver has always been more volatile than gold because it is a smaller market, so equal speculative dollars make a bigger impact, but many in Congress worried that the Hunt trading was designed to make a big splash, like a cannonball dive into a small pond.
Congress held hearings in 1974 to establish the Commodities Futures Trading Commission (CFTC) to regulate all futures trading to replace the Commodity Exchange Authority, established in 1936 with a mandate limited to futures markets in traditional agricultural products like wheat, soybeans, and corn. The growth of futures trading in nonagricultural goods like copper, silver, and lumber spurred the new legislation as did the pote
ntial for fraud and manipulation in these newer markets. Congressman Fernand St. Germain, representing Rhode Island, the center of silver manufacturing in the United States and home to the New England Manufacturing Jewelers and Silversmiths Association, clamored for relief. He cited the Hunt accumulation and revived the historic battle between America’s East Coast manufacturing and western mining interests: “Silver is an unregulated commodity and apparently there is no way to prevent an individual from holding for personal gain an unlimited quantity. … I submit that these multimillionaires acting in unison should not be allowed to hold the silver-using industries at ransom.”11 He then added a broader concern: “It is difficult to be sympathetic to two oil barons whose thirst for personal gain and further enhancement are having the result of forcing silver prices upward, of adding another inflationary factor to the economy.” Congressman St. Germain warned his House colleagues when debating the CFTC bill: “These practices raise the question as to whether an investigation should be made … to prevent the cornering of the market by a few individuals.”
St. Germain made his constituents proud. Although the Hunts were never formally charged with manipulation, Congress gave silver special treatment in the Commodity Futures Trading Commission Act, requiring that “the Commission should take all steps necessary to ensure that on the effective date of the Act, silver futures trading will be effectively regulated.”12 The legislation specifically recommended “investigations” and regulations “on the proper speculative limits for silver futures trading.” But many dismissed the danger, including Henry Jarecki, chairman of Mocatta Metals Corporation. When a reporter asked Henry whether the Hunts were behind the explosion in silver prices, he said, “I tend not to believe it.”13 He would suffer the consequences.
Henry Jarecki had built Mocatta into a trading powerhouse after just four years in existence, growing the company into the largest bullion dealer in the United States according to his calculations.14 Henry had expanded beyond the narrow arbitrage business that had lured him away from medicine and had become a dealer specializing in silver bullion. Jarecki courted all the major silver-producing countries in the world, including the big three, Mexico, Peru, and Canada, and visited the largest consuming companies, focusing on Kodak in Rochester, New York, and 3M, formerly Minnesota Mining and Manufacturing, in Maplewood, Minnesota. With contacts on both the production and consumption sides of the market, Mocatta became the premier middleman, buying at its bid price and selling at its offer to earn the spread, similar to the used-car business. A used-car dealer buys Chevrolets and Hondas from owners wanting a change and sells those cars to drivers who want to buy, making money on the price markup and rapid turnover. Dealers also try to avoid a big inventory of unsold cars.
Mocatta bought and sold physical bullion but it was usually for future delivery at a guaranteed price. For example, Henry’s traders might arrange to buy silver from Mexico in three months at an agreed-upon bid price of $5.00 an ounce and to sell silver to Kodak in three months at an agreed-upon offer price of $5.10 an ounce. Mocatta earned the middleman’s ten-cent spread with no risk if buying and selling interests balanced, but that was not always the case. Mocatta had to quote bids and offers continuously to attract business, to be a reliable marketmaker providing liquidity, but orders on either side could run fast or slow.15 Excessive selling by Mexico and insufficient buying by Kodak increased Mocatta’s silver inventory, bringing losses if prices declined, and less selling by Mexico and vigorous buying by Kodak left Mocatta short of silver inventory, producing losses if prices rose. Henry had been a pioneer in computerizing his business to stabilize inventory: when too much accumulated, his program recommended lower prices to buy less, and when inventory fell short, it recommended higher prices to buy more. But that delicate dance faltered just when he needed it most.
Henry romanced his potential business contacts to keep them close, especially Luis Chico, deputy manager of the International Division of Banco de Mexico, the Mexican central bank, which managed that country’s considerable silver exports. Luis was thin, always well dressed, and the perfect gentleman. Henry recalls, “When we were out to dinner and a woman left the table for personal reasons, Luis would jump to his feet and escort her to the powder room.”16 Henry knew the women were pleased and envied Chico’s skill at turning a cartoonish gesture into attractive manners. During one of those dinners in 1971, when Henry was just getting started, Luis said he wanted to sell a substantial accumulation of scrap silver in the bank’s vault and wondered whether Mocatta would help. Henry recognized the opportunity to make a lasting friendship and bought the scrap silver at the closing price on Comex, a far too generous number considering the transportation and refining costs he would incur. Henry expected the gesture to pay dividends, which it did.
A Chicago banker introduced Henry to the Hunt brothers soon after his deal with Chico, and he flew from New York to Dallas to offer his brokerage services.17 They picked him up at the airport in a beat-up old Cadillac, Herbert behind the wheel and Bunker riding shotgun in the front. Henry sat in the back, enjoying the wealthiest chauffeur service in the world, until they arrived at Bunker’s two-thousand-acre Circle T ranch outside Dallas. Henry recalls the wide-open space, the endless herd of cattle, and the suddenly bumpy ride along a rutted dirt road. It was a bad omen, and he recognized a problem during his sales pitch when Bunker disappeared and was found later sound asleep on a couch.
The failure to corral the Hunts left Henry stranded when silver exploded in late 1973. With Comex prices reaching new highs just about every day, Mocatta’s big silver-using clients, Kodak and 3M, began buying for future delivery at a much faster pace than producers like Mexico and Peru were selling. Mocatta’s traders tried to restore balance by raising the bid price to buy more and raising the offer price to reduce sales. But their measured responses fell short as silver raced into uncharted territory just as it had after the Crime of 1873, a century earlier. This time prices went up rather than down but caused similar disruption. Towards the end of February 1974 Mocatta was short 5 million ounces of silver, meaning it had promised to deliver 5 million ounces more than it owned, and the run-up in prices had produced a loss of over $20 million.18 Moreover, that loss would mushroom if Mocatta tried to buy the 5 million ounces on Comex to make up its shortfall. Floor traders monitoring the Hunt accumulation would force Mocatta to pay dearly for the silver needed to correct its error, squeezing the life out of Henry’s young company. Mercy in the futures ring is as rare as at the poker table. The mistake hurt Henry’s pride, and the loss would make his London partners think he had been speculating rather than running a reliable business, that he had misrepresented himself to Jocelyn Hambros. Henry recalls, “I was worried about damaging our still young relationship with Hambros Bank.”19 The crisis threatened Mocatta Metals Corporation with bankruptcy.
Henry needed 5 million ounces of silver without going public. He knew that Banco de Mexico had a vault full of the white metal so he called his friend Luis Chico, who agreed to sell him 5 million ounces directly but wanted a ten-cent premium over Comex.20 Henry said yes before Chico could hang up the phone, knowing that trying to buy that amount quickly on the Exchange would cost much more. He had escaped disaster because of who he knew, a lesson he would remember for the rest of his career. He also admitted feeling much better about “buying that lousy scrap silver from Chico.”21
Luis Chico bailed out Henry Jarecki and also slaked the speculative binge in silver. He had been sitting on 45 million ounces of the white metal and the lucrative sale to Henry was the first course in a sumptuous feast on fattened silver prices.22 Henry handled the sale of Chico’s remaining 40 million ounces on Comex, dumping the last 4 million at the peak cash price of $6.70 per ounce on Tuesday, February 26, 1974, into the anxious hands of Alvin Brodsky. But fewer speculators wanted the white metal now that it was in abundant supply and prices collapsed. On Tuesday, March 5, the cash price of silver hit $4.98, a 25% decline in a week, lopping $80 million o
ff the value of Bunker and Herbert’s 47-million-ounce position. The Hunts learned what Treasury Secretary Henry Morgenthau had discovered forty years earlier—the law of supply and demand applies to everyone. Bunker would need help to realize his dreams for the white metal.
Silver remained in the $5.00 range through April, leaving the Hunt brothers with a hefty paper profit on their overall position. They began to take delivery on their 2,700 expiring futures contracts when Bunker made a cameo appearance at the Commodity Exchange in Lower Manhattan just to view the combat zone. His presence momentarily silenced the haggling coming from the two big circular arenas where copper and silver traded, as everyone turned to see the round and rumpled Texan who had jolted the market. He remained unbowed in his conviction that anything is better than paper dollars, saying before he left the battleground: “If you don’t like gold, use silver. Or diamonds. Or copper. But something.”23 Bunker made sense, even though commodities, especially silver, fluctuated in value like all risky investments. Consumer prices had risen by more than 3% during the first quarter of 1974, on pace for an annual rate of inflation exceeding 12%, which meant that during the year the dollar would shrink in value to about what 88¢ could buy.24
The white metal was $4 an ounce in late 1974, well below its recent record but, considering its long and wounded history, the equivalent of Pike’s Peak. Silver had been a second-class monetary metal since 1873, begging for a political handout from the likes of Key Pittman and FDR, but had become a hard asset in a world of fiat currency, a hedge against inflation, and its elevated price compared with Alexander Hamilton’s $1.29 reflected the new reality. Alan Greenspan, President Ford’s chief economic adviser and a future Federal Reserve chairman, gave investors good reason to worry that inflation would continue. In the Economic Report of the President covering 1974, he documented an accelerating inflation since 1965 and attributed the new trend to “increasing government expenditures along with monetary policies that were appreciably more expansionary” than in the past.25 Silver was an attractive hedge against inflation but would have to compete with gold in America after December 31, 1974, when the forty-year ban against U.S. citizens investing in the yellow metal ended. Silver remained the favorite of the Hunts, however, who worried that gold was vulnerable to political pressure, which is why they removed their hoard of the white metal from American soil.
The Story of Silver Page 19
