The Story of Silver

by William L. Silber

  Bunker ignored history and paid for it.

  CHAPTER 19

  * * *

  COLLAPSE

  THIEVES IN THE WEALTHY TOWNS OF WESTCHESTER COUNTY, JUST north of New York City, loosened Bunker Hunt’s grip on the silver market by turning stolen sterling into bullion bars for sale on the exchanges. State troopers reported more than one hundred burglaries between November 1979 and January 1980, and silver was stolen in eighty-five cases. William Adams, a police detective in the Westchester town of North Castle, described a typical break-in: “They go into the bedroom and grab a pillowcase and then into the dining room and clean out the sideboard. They don’t worry about how the pillowcase looks when they are leaving, because when they’re leaving, they’re running.”1 Adams added, “Flatware, consisting of knives, forks, and spoons, is the first silver item stolen.” The New York Times quipped, “When the police saw a man running through the woods with a pillowcase over his shoulder, they knew that he wasn’t on his way to the laundromat.” Sometimes the thefts were inside jobs. Police in the town of Mount Kisco reported “two cases where teenagers had stolen their own family silver and tried to sell it.”

  The spectacular price increase had sparked the epidemic of pilfered silver. A place setting of sterling, which cost about $30 or $40 when silver was $1.29, was now worth at least $500. A Hartford, Connecticut, jeweler advertised a four-piece place setting of the Old Maryland Engraved pattern by Kirk Stieff for $637.50, making a service for twelve an attractive target worth more than $7,000.2 One policeman said, “If the silver is stolen by 10 am it’s melted down by 3 pm,” but Westchester Detective Adams thought it was much quicker, having heard of a thief “running around and melting it down right in the truck.”3 Recovery is impossible after the silver becomes bullion. And by January 1980 the burglary plague had spread beyond New York suburbs. A detective in the Houston police department, J.C. Davis, said, “The rate of metal grabs has doubled in the past six months.”4 Davis described a home burglary where “the television, the stereo, and the usual Texas gun collection were thrown into the swimming pool, but the silver and the jewelry were taken.” Detectives in suburban Detroit’s Oakland County complained about “advertisements by coin and metals dealers in the local papers offering to buy old gold and silver with ‘no questions asked.’ ” Lieutenant Donald Zimmerman of Oakland’s Bloomfield Township said, “Of course it’s an invitation for stolen goods.”

  The influx of hijacked silver swamped refineries already stretched thin. The Los Angeles Times announced, “People Cashing In on Precious Metal Boom,” and reported that the president of American Silver Recovery, Inc., a local refinery, recommended, “If you have old material (silver or gold) sell it. If it’s sitting in the attic, or tucked away in a drawer, take it out and sell it.”5 Some folks went further and sold antiques that had been in their family for generations. Sebastian Musco, president of Gemini Industries, another refinery, said, “People are in a panic and the sadness of it all is they’re ruining precious heirlooms. Somebody came in the other day with a sterling silver coffeepot made in the 1800s … and they wanted to sell it for scrap.”6 The headline “Britons Liquidate a Heritage” confirmed the mania had spread across the Atlantic.7 U.K. bullion dealer Johnson Matthey reported, “Every item bought over the counter was immediately destroyed, including a 1748 silver salver [sterling tray] it recently took in.” A manager at precious metal dealer D. Penellier & Company, located in London’s Hattan Garden jewelry district, said, “It’s an absolute crime,” while examining a Georgian tea service he had bought for scrap.

  Henry Jarecki became rich turning America’s old silver coins into bullion during the 1970s but the profit incentives in January 1980 made everyone an arbitrageur. Two teenagers in Chicago, accompanied by their mother, took $200 in pre-1965 dimes and quarters inherited from their grandfather to a downtown Loop coin shop and walked away with $4,000.8 Numismatists made money selling their coin collections for scrap, to the dismay of professional dealers. Harry Forman, a well-known Philadelphia expert, sounded as thoughhe had lost close relatives to a pandemic when naming coins that had been scrapped, including “such one-time premium items as … 1931-D and S Mercury dimes, 1937-S and 1955-D Washington quarters, and 1948, 1953, and 1955 Franklin half dollars.”9 He added, “We’re witnessing the great melt of the century.” Joel Coen, a major New York City dealer, said, “I myself am delivering from $2 million to $4 million worth of silver coins to melters every week. And if we keep destroying all these coins, what will be left to collect in years to come?” The U.S. Treasury joined the party by scouring its vaults for hidden treasure, finding a cache of nearly one million silver dollars that had been minted between 1878 and 1893 in the now-defunct Carson City mint, and selling them at prices between $45 and $65 each.10

  Bunker Hunt would have to buy all bullion bars, whether from newly mined silver in Mexico and Peru or from melted stocks of coin dealers and antique shops, to keep prices high. He also had to worry about increased bullion on world markets, smuggled out of India by way of Dubai, equaling about half of Mexico’s annual output in early 1980.11 Estimates of silver jewelry adorning the neck, wrists, and ankles of Indian peasants run into the billions of ounces but are immobilized by custom and law.12 Tradition dictates that Indian women can inherit only what they are wearing so they store their wealth as gold and silver jewelry. The Indian government banned silver exports in February 1979, but the price surge since then encouraged a steady outflow of the white metal via oceangoing dhows that hid silver the size of a loaf of bread among their cargoes of cloth, rolls of carpet, and toys.13 Ashraf Amin, one of Dubai’s biggest precious metal dealers, said, “We have an open trade,” which the press confirmed with the banner, “Smuggled Silver Trade Revives in Dubai.”14

  Bunker had ignored aboveground supplies until the headlines hit, wondering, “Why would anyone sell silver to get dollars? I guess they got tired of polishing it.”15 But there was at least 2.5 billion ounces of the white metal in coins, silverware, and other secondary sources in the United States, waiting silently for the right price, far more than informed experts like Henry Jarecki had estimated and enough to cover twelve years of the shortfall between world production and consumption touted by silver bulls.16 The price was right in January 1980, and molten silver poured into bullion bars, but a shortage of refinery space prevented these secondary supplies from dominating the market and blunting the upward price pressure. A Gaithersburg, Maryland, coin dealer said, “The smelters have their hands filled. They’re not buying at all right now,” and the Washington Post confirmed, “Refiners stopped buying … as storerooms overflowed.”17 The refining bottleneck would eventually soften, but the Commodity Exchange could not afford to wait for supply to overwhelm demand. Silver traders had begun to melt away and Comex had to fight for its life.

  The daily volatility of silver prices had doubled during the last three months of 1979 compared with a year earlier, and in the first two weeks of January 1980 prices varied between a high of $43.75 an ounce and a low of $33.65, an intimidating range of 30%.18 The increased risk had cut trading volume in half on the Commodity Exchange in early 1980, but it was not just speculators who disappeared.19 Jewelers and precious metal dealers turned away customers to avoid the uncertainty. Eugene Berkowitz, president of Rose Industries, in the heart of Chicago’s jewelry center at 29 East Madison Street, explained why he stopped buying silver from customers: “I discontinued buying this stuff … because of the volatile nature of the market.”20 The Chicago Tribune reported that John Ross, a veteran coin dealer at 12 West Madison Street, “sent speculators to the yellow pages to do their shopping,” much to their displeasure.21 Both businessmen boycotted the silver market to avoid volatility, but Comex could not afford to do that since the market was their business.

  The Commodity Exchange Board voted on Monday evening, January 7, 1980, to impose position limits on speculators for the first time since it was established in 1933. The new rules prevented speculators
from holding more than 500 futures contracts in the delivery month and limited their total net position to 2,000 contracts.22 Comex Chairman Lowell Mintz said, “We took the action on our own initiative in order to maintain orderly markets,” but everyone knew it was aimed at the Hunts, especially to prevent them from taking delivery of silver from exchange warehouses.23 The press reported widespread “concern that a handful of large holders of silver futures, such as Hunt family interests in the United States and oil rich traders from the Middle East, might cause a squeeze on the market.”24 Bunker would have to reduce his futures position on Comex and responded to the regulations as though he were tweaking an opponent before a heavyweight championship fight: “I am more likely to take action to accept delivery on maturing silver futures contracts now that the … markets have set position limits.”25

  But Bunker knew when to attack and when to sidestep a jab. He lowered his profile on Comex during the week of January 14, 1980, by reducing his futures position through an EFP (exchange of futures for physicals) with industrial giant Engelhard Minerals & Chemicals, similar to the transaction with Mocatta Metals in October 1979, only bigger.26 The agreement, initiated by Raymond Nessim, vice president of the Philipp Brothers division of Engelhard, gave the Hunts approximately 28.5 million ounces of physical silver at an average price of about $36 an ounce and gave Engelhard long positions in Comex futures contracts on the same amount of bullion. The transaction pleased both sides. Engelhard needed those futures contracts to reduce its short position, which had cost the company millions in interest on variation margin payments, and Bunker needed to reduce his futures position to avoid violating position limits. The total bill for the 28.5 million ounces was a little over $1 billion, which the Hunts agreed to pay in installments over the next few months. The largest payment of $434 million would come due on March 31, 1980, although Engelhard had the option to accelerate delivery of the bullion and receive that payment on March 3. No one suspected this was a time bomb primed to explode in Bunker’s face.

  Comex’s new position limits produced a price decline, but the impact resembled a speed bump on the road to higher prices. On Friday, January 18, 1980, silver prices reached an all-time high of $50 an ounce during the trading day, a record that still stands, making the Hunts’ 200 million ounces worth $10 billion.27 After subtracting related borrowings of about $500 million, their silver position was worth more than the estimated value of Bunker’s Libyan oil field discovery. For the country club set the $50 price meant that a sleeve of three sterling silver golf balls (a special Father’s Day gift), each ball containing 1.366 troy ounces of pure silver, would cost $204.90 compared with $5.29 at the white metal’s pre-1967 price of $1.29, a strong incentive to keep the ball on the fairway.28

  History had confirmed the wisdom of Bunker’s decision to buy the white metal in 1973, when prices were less than $3 an ounce, and to “double down” like a great blackjack player with the political and economic turmoil that began in 1979. Both gold and silver had jumped in value since February 1979, when the Ayatollah Khomeini had returned from exile to lead the Iranian revolution, but the more volatile silver rose about sevenfold while gold increased half as much.29 As a result, on January 18, 1980, when gold reached its peak of $850 and silver hit $50, the price ratio of gold to silver declined to 17 to 1, close enough to the historic 16 to 1 ratio to confirm Franz Pick’s bold prediction a few months earlier and to make the Hunts heroes in the century-long battle to reverse the Crime of 1873.30 William Jennings Bryan could finally rest in peace without contemplating another presidential run.

  Investors who followed Bunker’s advice made a killing, but an innocent observation from precious metals analyst Bud Sward of the Shearson Loeb Rhodes brokerage firm should have worried the silver bulls. Sward claimed, “Silver isn’t a poor man’s metal anymore. It is really losing its appeal to any speculator who wants to trade.”31 Silver had outperformed gold, in part, because it was the metal of the people, the same reason it dominated as the medium of exchange throughout the world until the nineteenth century. Few cared that the white metal no longer served as currency as long as it remained a rock-hard asset to protect against inflation. But the Commodity Exchange needed speculators in the market to survive, which is why the exchange barred the Hunts from buying more silver after January 21, 1980.

  The Comex board met Monday morning, January 21 at 9 o’clock, and suspended the normal 9:40 opening of silver while considering new emergency regulations for trading the white metal.32 The discussion lasted longer than expected and the silver opening was first delayed until 11 a.m., then to 12:30 p.m., and finally to 1:30 p.m. According to board minutes, members believed the market was “out of control” and no longer served a “legitimate economic function.”33 Board member Henry Eisenberg, representing metals dealer Brandeis, Goldschmidt & Co., said the longs “had achieved a classic corner.”34 Another member, Edward Hoffstatter of Sharps Pixley, a participant in the daily London fixing, described the price increase between January 7 and January 18 as “an indication of the congestion of the market and the fact that new longs were coming in every day.”35 He suspected these “were not new longs but just new names controlled by the same old parties.” A Securities and Exchange Commission investigation later showed that at least “twenty-one Hunt family members and related entities held or traded silver.”36 At 12:30 the board voted to declare an “emergency” in silver futures and to “limit trading in Comex silver for all delivery months to liquidation only,” which meant that “longs” like the Hunts could only sell (liquidate) their positions and could not buy.37 The vote was unanimous, including two board members who had done business with the Hunts, Mocatta’s Henry Jarecki and Engelhard’s Raymond Nessim.38

  During the abbreviated trading session on January 21, which started at 1:30 p.m. and ended at the normal 2:15 p.m., the spot price on Comex declined less than $3 to $44.39 The Wall Street Journal commented, “It is unclear whether the Comex’s controversial move will force the big speculators … Herbert Hunt and his brother Nelson Bunker Hunt … and the clients of Norton Waltuch … to abandon existing positions.”40 Clarity emerged the following day, Tuesday, January 22, when the Chicago Board of Trade joined Comex’s attack on the alleged manipulators and imposed its own version of liquidation-only. The silver bulls had no escape from the new rules and sellers drove down the spot silver price to $34 an ounce, an unprecedented $10 decline.41 A headline in the U.K.’s Guardian newspaper, “Comex Curbs Hit Bullion,” memorialized the power of the larger Commodity Exchange that started it all, but the more significant drop occurred only after the Chicago Board of Trade joined the fray, making both exchanges responsible.42 The 30% collapse on January 21 and 22, the largest two-day price decline since the white metal began trading freely in 1967, marked the end of the long bull market and the beginning of an earthquake for the Hunts.43

  Herbert and Bunker lost about $3 billion on Monday and Tuesday, January 21 and 22, and protested the following day in a letter to Comex president Lee Berndt. The Hunts complained that the Comex board action was a “breach of trust,” liquidation-only trading was not “market neutral,” and “was designed to have a downward effect” on price and to “give aid and comfort to those who were short in the market.” 44 The Hunts did not mention board member Raymond Nessim by name, but as first vice-chairman of the Comex board he had set up the emergency meeting.45 Nessim’s position with the Philipp Brothers division of Engelhard Minerals & Chemicals, which was still short more than 4,000 futures contracts on January 21, the most of any Comex board member, suggested a potential conflict of interest even though it was to hedge its physical bullion.46 Engelhard wanted lower prices to reduce crushing interest charges for margin on their short position.47 The Hunt letter urged Comex to “reconsider” its rule and warned that failure “to rectify the Board’s biased actions will inevitably result in legal and financial problems for the Board of Comex, the participants, and all concerned.”48

  Bunker went public with
a reference to urban easterners taking advantage of rural westerners, saying the insiders at the exchange had been upset because “they figured that if there was any money to be made, they should make the money.”49 He complained to the press: “I bought futures under the rules that existed and suddenly the rules were changed. That doesn’t seem fair.”50

  Bunker had a point. Futures trading is a contact sport like football, but America’s favorite pastime establishes rules beforehand and sticks to them. Players push, grapple, and shove to win on the gridiron, risking serious injury in the process, but the home team about to kick a forty-yard field goal, for example, cannot move the goal posts forward to the thirty-yard line. Why is futures trading less evenhanded than professional football?

  Henry Jarecki had worried about the fairness of changing the rules and had discussed it with his lawyer Tom Russo before the Comex board meeting. Russo made Henry smile by telling him, “Ah, but one of the rules is that futures exchanges are permitted to change the rules. Everyone knows this and must adapt.”51 The press had referred to liquidation-only as “one of the most extreme actions a futures exchange can take and is rarely invoked,” but the Hunts should have paid attention to recent history.52 In November 1979, two months before the restriction in silver, threats of a squeeze forced New York’s Coffee, Sugar and Cocoa Exchange to impose liquidation-only in coffee, and Comex itself did the same in copper, although in both cases the new rules applied only to the delivery month, making them less onerous.53 The liquidation rule inflicted a major loss on the Hunts, but the Commodity Exchange was well within its rights, so Bunker’s complaint received little sympathy, except from William Proxmire, the maverick senator from Wisconsin, chairman of the Senate Banking Committee, who investigated the Hunts’ charges of conflicts of interest on the Comex board: The “incredibly large short positions” give “the appearance of very substantial self-interest by the very people who were making the decisions.”54 The Hunts never sued, although Bunker accused Comex board members of positioning themselves to profit on the new rule: “I’ve heard at least half of them made a huge amount of money,” which one eyewitness confirmed.55 The Comex board modified the rule on Wednesday, February 13, but liquidation-only marked a turning point in the white metal that would force Bunker and Herbert to pledge their Hunt family inheritance to avoid bankruptcy.56