The Story of Silver

by William L. Silber

  Henry Jarecki denied that “Mocatta’s solvency was ever in question,” but Herbert’s claim that rising silver prices forced Henry to borrow heavily at high interest rates to meet margin calls rings true.49 Mocatta had amassed a huge stock of silver inventory by scouring the country for pre-1965 coins and sterling silver heirlooms, paying premium prices to pry the white metal from proud owners. Mocatta leased the coins and the sterling for a handsome fee and sold short silver futures on Comex and the Chicago Board of Trade (CBOT) to protect its inventory. Mocatta was short silver futures but it was a risk-reducing hedge rather than speculation. Price declines would lower the value of its inventory and the short futures positions would offset the loss; price increases would raise the value of its inventory which was balanced by a loss on futures. Henry slept well at night collecting fees, knowing that his silver inventory was protected, except for the occasional nightmare called variation margin payments.

  Comex and CBOT futures do not require paying for the underlying silver until the delivery date, but price changes until then are settled every day in cash called variation margin payments. On September 18, 1979, for example, silver rose by $2 an ounce so a Mocatta short position of about 20 million ounces of futures required a payment of $40 million to the Comex and CBOT Clearing-houses for distribution to those who were long futures.50 Mocatta’s net worth remained the same because the value of its inventory increased by the same amount, but it still had to borrow the necessary cash and the bankers, who equated futures trading with casino gambling, were skeptical.51

  The Hunts worried about Mocatta’s finances and wanted to repay the loan to get back their silver collateral but ran into a roadblock erected by Jarecki’s lawyers. Tom Russo, thin with an olive complexion, born and raised in New York, provided Henry with expert legal advice. He was a partner at Cadwalader, Wickersham & Taft, the oldest law firm in New York City, had been the first director of the CFTC’s Division of Trading and Markets, and, more importantly, Tom thought like a businessman. Russo knew that Mocatta made money lending out silver inventory, including the bullion left as collateral by Bunker and Herbert, so he designed the loan contract to prevent the Hunts from repaying early and withdrawing their silver. It was a sensible business decision that turned the confrontation with the Hunts in Jarecki’s favor, allowing Henry to play his cards like a finalist in the World Series of Poker.

  Herbert says that he and Bunker spent a week in Jarecki’s office working out a plan: “We did everything but sleep there. They brought in dinner about 10 or 11 each night. And each day we went out and bought another shirt.”52 The cash price of silver continued to rise during their negotiations, reaching $18 an ounce on Monday, October 1, 1979, a significant 9% jump following a speech on Sunday evening by former Federal Reserve Chairman Arthur Burns blaming American inflation on “political currents that have been transforming economic life in the United States.”53 Herbert remembers Henry rushing into the conference room and saying, “When it hits $22.90 I’m broke—Mocatta is insolvent.”54 A few minutes later Herbert says Jarecki returned even more alarmed and said, “I’ve miscalculated. The figure’s a little lower.”55

  Henry said later that the Standard Chartered Bank, which had taken over Hambros Bank’s interest in Mocatta, had “infinite deep pockets” and would have extended credit to maintain his hedged portfolio, but he had every reason to feign panic to the Hunts.56 The more nervous they were about Mocatta’s solvency, the more anxious they became about getting back their precious metal. The negotiations settled on Mocatta transferring 23 million ounces of physical silver to the Hunts in exchange for an equivalent number of futures contracts, which Jarecki would then use to cancel his short position. The increase from the original 10.7 million ounces to 23 million gave the Hunts more physical silver, which they loved, and allowed Jarecki to cure his entire variation margin headache. It was a basic transaction called an EFP, exchange of futures for physicals, complicated by Mocatta’s unique inventory of coins and silver-lease contracts with banks and industrial companies. The value of a standard sealed bag of coins, for example, with a face amount of $1,000, depends on the price of the white metal and also on the abrasion of the coins.57 Hunt lawyer Bart Couzins complained, “We had to stay right on our toes” to keep from being outsmarted by Jarecki and admitted, “He got the best of us by three or four ounces per bag.”58 Tom Russo recalls Bunker accentuating his Texas drawl, “You’re selling us the cow and keeping all the milk.”59

  A surprise in the EFP agreement signed on Friday, October 5, 1979, confirmed that the Hunts had recruited allies in the market. Bunker instructed Mocatta to deliver the 23 million ounces of silver to IMIC, the Bermuda-based company the Hunts owned with their Saudi Arabian partners. IMIC had purchased about 20,000 futures contracts between July and September, representing 100 million ounces of silver, helping to drive up prices and giving it a platform to squeeze the market higher by demanding delivery from Comex warehouses.60 But now that Henry was no longer short he seemed less concerned with allegations that the Hunts were cornering the market, except the lengthy negotiation had taken its toll.61 He complained to a friend, “Bunker Hunt cost me a lot of sleep. But for every hour he’s cost me I’m going to make him lose ten.”62 Bunker said, “I’m a very good sleeper. I may lose money, but I don’t lose sleep.”

  Perhaps he should have bought an alarm clock. Henry Jarecki was a member of the Comex Board of Governors, and the exchange was not about to let the Hunts destroy their marketplace by artificially inflating prices.

  Comex, like most financial markets in the United States, including the New York Stock Exchange and the Chicago Board of Trade, is a self-regulatory organization that polices itself under the guidance of a federal authority, in this case the CFTC. The Board of Governors is elected by exchange members to maintain a fair and orderly market to attract hedgers and speculators, who generate orders and commissions for members.63 The big brokerage firms, including Merrill Lynch, E.F. Hutton, and Bache Halsey Stuart Shields, were represented on the Comex board, as were industrial companies like Engelhard Minerals & Chemicals Corporation, and trading companies such as Mocatta Metals and J. Aron & Company. The Comex board also included a representative of the general public, Andrew Brimmer, former member of the Federal Reserve board, to ensure a fair deal for customers.

  The Comex board established a Special Silver Committee under Brimmer’s chairmanship to monitor the market and maintain order after the doubling of silver prices during August and September.64 At one point the committee asked Walter Goldschmidt, chairman of ContiCommodity Services, to keep the firm’s star broker, Norton Waltuch, away from the silver ring because of his disruptive impact.65 Goldschmidt argued that Waltuch was a dues-paying exchange member in good standing and had every right to trade, but Norton agreed to make fewer appearances.

  Comex increased the good faith margin deposit required for silver contracts to dampen the speculative frenzy and so did the Chicago Board of Trade. The CBOT also voted to impose position limits, a maximum of 600 futures contracts for each trader, which would force Bunker and Herbert to reduce their holdings. Position limits had worried the Hunts since the soybean saga, and Bunker complained to anyone who would listen, “This is like Libya. They’re taking my property away.”66 But the exchange had every right to change the rules to protect the integrity of its market, and Bunker knew this from the beginning, which was one reason he took delivery of physical bullion and shipped it to Switzerland. Bunker added a broader complaint reminiscent of the battles between eastern bankers and rural westerners throughout American history, “The home-town boys who run the markets don’t want anybody from out of town to make any money.”67 The outcry pushed the CBOT to delay position limits after Bunker and Herbert promised not to take delivery on their February 1980 futures contracts, but these were just the opening salvos in the white metal wars.68

  The New York Times headline on October 29, 1979, “Squeezing the Market in Silver,” exposed the alleged conspirators
to public scrutiny.69 Most traders refused to be quoted but currency consultant Franz Pick, whose book on silver had brought Mocatta & Goldsmid to Jarecki’s attention years earlier, said, “I’m 82 years old and don’t care how many more enemies I make.” Pick listed his least-favorite manipulators, including Norton Waltuch who has “steadfastly refused to discuss his trading operations,” the Hunt family “that has also refused all comment,” and finally “the Kuwaiti element, which is actually a much broader group of Mideast oil money.” Franz may have mislabeled some of the participants, but he warned, “By placing large orders … they could easily run up the price.” Silver had already advanced relative to gold during the year, increasing by more than 150% in value compared with about 70% for the yellow metal, which the CFTC would later use as proof of manipulation.70 The price ratio of gold to silver started the year at 36 to 1, meaning it took thirty-six ounces of silver to buy an ounce of gold, and now the ratio was 23 to 1.71 Pick suggested that the manipulators had targeted the “historic ratio with gold of 16 to 1” that existed prior to the Crime of 1873. Bunker countered that the price ratio of gold to silver had nothing to do with manipulation but reflected normal supply and demand. Both precious metals rose in value because of economic and political uncertainty, but silver’s industrial use compared with unproductive gold would ultimately drive the price ratio much lower, perhaps to 5 to 1, so that only five ounces of silver were needed to buy an ounce of gold.72 Bunker picked 5 to 1 because it was lower than 16 to 1 but he could have gone further. In ancient Egypt silver’s scarcity and medicinal properties had made it more valuable than gold.73

  The Commodity Exchange Act prohibits manipulation but does not define it, so the courts must identify the ingredients.74 One appeals court said it was “the creation of an artificial price by planned action,” which is easy to say but hard to prove, especially with prices responding continuously to provocative news.75 Disentangling the impact of alleged manipulators from legitimate speculators took extensive litigation in this case.76 The CFTC argued that during the second half of 1979, Norton Waltuch and the Hunts, together with their Arab collaborators, coordinated a scheme to drive up silver prices by purchasing over 200 million ounces of the white metal, more than the combined annual output of Canada, Mexico, Peru, and the United States, the four largest noncommunist producing countries.77 The manipulators pressured the market by controlling more than 40% of silver in exchange warehouses and by taking delivery of almost 50 million ounces of bullion. But the alleged manipulation was not the classic corner of futures markets, where the longs prevented the shorts from delivering. As silver prices accelerated in December 1979, for example, even the CFTC said that the shorts “anticipated no difficulties in making delivery on their positions.”78 Instead, some plaintiffs argued that the manipulation closely resembled the “pump and dump” scheme associated with “penny stocks.”79 Latecomer buyers claimed that the Hunts touted silver as a great investment, bought bullion to push up the price to convince others to join the bandwagon, which caused an artificial price spiral.

  The Hunts denied manipulative intent, dismissed any coordination, even among themselves, and justified their demand for silver as a hard asset to protect against global risks, a view supported by David Rutledge, an executive vice president at Comex: “We don’t have reason to believe that the resurgence in silver prices is due to anything other than the international political situation.”80 Bunker never sold to any “latecomers” and protested to anyone within earshot, “I am not a speculator. I am not a market squeezer. I am just an investor and a holder of silver.”81 The legal confrontation dragged on for years, but the unfolding battle snared some surprising victims.

  James Sinclair, head of his own brokerage firm, complained that the “silver market has been all but destroyed by uncommonly greedy manipulators who have … driven the public out of this futures market.”82 A 50% decline in silver’s average daily trading volume during October 1979, compared with the previous nine months, confirms Sinclair’s complaint, but some of that decline resulted from increased margin requirements.83 Not everyone stayed away, of course. Buying silver required money and conviction that it was the best hedge against economic turmoil, which explains why Bunker’s youngest brother, Lamar, let the white metal distract him from his Kansas City Chiefs football team. Lamar says he first bought silver “because I thought it was a good investment based on things I had heard Bunker say [and] articles I had read.”84 But unlike his brothers, who began buying in 1973, Lamar entered the market in 1974 and admits, “I saw a price rise and [as] a typical naïve investor I was late getting in and I lost money.”

  But Lamar Hunt was not a typical investor and could hold a losing position until it became a winner, which it did by 1979. Lamar began to invest again, using a teaspoon compared with Bunker’s steam shovel, but enough to make him pay attention in October 1979, except Sunday afternoons when he rooted for his Chiefs who had a promising 4–2 record.85 It was almost ten years since their January 1970 Super Bowl victory, when Lamar proudly cradled the sterling silver trophy, whose value had increased almost tenfold with rising white metal prices, and he hoped the Chiefs might be ready to repeat.86 A five-game losing stretch after the promising start destroyed their chances, but Lamar took comfort from silver’s explosive 1979 finish.

  FIGURE 17. Lamar loved sports.

  Escalating international tension beginning November 4, 1979, when Iranian students took U.S. embassy personnel hostage, combined with Russian troops in Afghanistan towards the end of December, helped turn the overheated market for the white metal into an inferno. On Monday, December 3, 1979, the Wall Street Journal headline, “Dollar Plummets as Mideast Crisis Triggers Jitters,” marked the U.S. currency’s decline to a record low against the German mark, and the accompanying article noted that silver made a new high at $20.05.87 Later in the month a New York Times article titled “Price of Gold Tops $500 for First Time” explained that “Ayatollah Ruhollah Khomeini said that Iran’s current conflict with the United States could worsen” and added concern over “reports that thousands of Soviet troops were in Afghanistan.”88 But none of those developments compare with silver’s spectacular performance during the last few days of the year.

  On Monday, December 31, 1979, silver closed at $34.45 an ounce, up almost 50% from Friday, December 21, 1979, the last trading day before the Christmas holidays.89 Many traders take vacation during Christmas week so the market is thin, meaning prices often bounce around like a pinball, especially when surprised by the Soviet push into Afghanistan.90 One trader said the obvious: prices spiraled higher “because there were just no sellers around.” A financial analyst made a more fundamental observation: “The role of silver in investment activities is undergoing a dramatic revaluation.”91

  Anticipating the new sentiment, the Hunts had made more money than anyone but a Hunt could have imagined. At the end of 1979 they owned approximately 200 million ounces of silver at an average price of about $8.92 Their profit at the year-end closing price of $34.45 was more than $5 billion, a number Bunker could use to erase his father’s putdown, “You’re not fit to be my heir.” But with H.L. gone Bunker simply said he “could not understand why anyone would be short silver.”93 Unfortunately for a Peruvian civil servant named Ismael Fonseco, those words never reached his ears.

  Ismael, a short and heavyset man in his early thirties, worked for Minpeco, a marketing corporation owned by the government of Peru and chartered to accumulate the country’s silver and other minerals to be sold on world markets. Minpeco sent Ismael to a training program in early 1979 where he learned how to use futures contracts to reduce Minpeco’s inventory risk.94 In September 1979 Minpeco owned 3.6 million ounces of silver, so Fonseco sold short about that amount in the futures market to protect the bullion against price declines. But Ismael wanted to be a rock star rather than a stodgy bureaucrat, so when silver approached $18 in early October, he began without permission to sell more futures contracts to profit from an expected
price decline. By the end of November Fonseco had sold short 15.7 million ounces of silver futures against an inventory of 3.6 million ounces of bullion, which meant that Minpeco was short the difference, or 12.1 million ounces of the white metal. Fonseco had made a bet like at the roulette wheel that would pay $12.1 million for every dollar decline in silver and would lose that amount for every dollar increase. By the time Ismael’s secret speculation was discovered and offset in mid-December, silver had increased by more than $6 an ounce, producing a loss of about $80 million.95

  Bunker had never met Ismael Fonseco but learned more about him after Minpeco sued the Hunts for manipulating prices and causing their loss. The Wall Street Journal reported, “Peruvian officials believe that Minpeco’s need to buy [about] 10 million ounces of silver futures in late December … contributed to the metal’s sharp rise at that time,” which suggests a self-inflicted injury.96 Bunker thought the incident showed government ineptitude, another lesson that socialism was the road to ruin, and Bunker was right— bureaucrats do not make good speculators, which is why Fonseco was fired. But the more powerful message was that Bunker had lost control of the market. Prices rose too far, too fast, in December 1979, failing to let the market breathe, and Bunker should have recognized the danger. Former Treasury secretary Henry Morgenthau, a farmer from Fishkill, New York, and a novice manipulator compared with Bunker Hunt, knew to avoid speculative excess when promoting the white metal under the Silver Purchase Act in 1934. At a news conference he had announced a thoughtful approach: “What we want is a rise in the price of silver, but we don’t want a sensational price rise, because the worst thing that could happen would be to have silver go up and then have a collapse.”97