The Story of Silver

by William L. Silber

  The auction at the Polo de Bagatelle club was an annual affair that had brought Bunker to the French capital before, but this was one of the few times he lost the bidding war for a horse. Fustok had Abdullah’s money to spend, and the Saudi royal family could easily match Bunker’s wealth barrel for barrel. The loss may have paid for itself, however, when Fustok and Nahas agreed to join Bunker following the competition for drinks and a conversation about horses and oil, which somehow ended with silver. Judging by what happened next, Bunker had delivered an inspired message.

  CHAPTER 18

  * * *

  SILVER SOARS

  THE ARRIVAL OF ISLAMIC MILITANCY IN IRAN MADE LIFE EASIER for Bunker Hunt, driving the white metal above $7 an ounce for the first time in history on Monday, February 5, 1979.1 According to James Sinclair, head of a brokerage firm bearing his name: “Anxiety has been heightened by the weekend events in Iran, which promises to raise the price of oil and reduce American and European influence in the Mideast.”2 The Ayatolah Khomeini, a white-bearded Muslim cleric wearing a black turban and flowing black robe, had arrived in Teheran from Paris on Thursday, February 1, two weeks after revolutionary demonstrators pushed the reigning Shah into exile. Khomeini greeted his supporters gathered at Teheran airport with, “Our final victory will come when all foreigners are out of the country. I beg God to cut off the hands of all evil foreigners and all their helpers.”3 Over the weekend the New York Times elaborated on the Ayatollah’s return from his fourteen-year separation:4 “Like Lenin returning to Russia after the overthrow of the Czar, Ayatollah Ruhollah Khomeini came home last week to complete his own very different form of revolution.” The Times added a dark prophetic note: “The process in Iran could be as chaotic and bloody as the consolidation of Bolshevik power.” When markets opened on Monday, February 5, investors grabbed for the white metal like it was a life preserver, starting a buying frenzy that would raise its value from $7 to $50 an ounce in less than twelve months, a sevenfold increase that has never been matched before or since. The difficulty of disentangling the role of worried speculators from scheming manipulators in the price explosion made Bunker smile.

  Silver’s upturn in February 1979 raised concern over a potential squeeze, and Henry Jarecki responded to the anxiety as though he were still making rounds at the Yale-New Haven Hospital. He had dispatched Mocatta teams to cities throughout the country, such as Columbus, Ohio, Des Moines, Iowa, and Springfield, Illinois, to buy silver jewelry, tea sets, and flatware from people needing cash more than shiny antiques.5 Three or four Mocatta employees would advertise their arrival in regional newspapers, rent a motel room for the weekend, and wait for locals carrying worn shopping bags filled with silver artifacts wanting premium prices for their metal. Henry described the heartbreaking scene of a teary-eyed elderly couple watching Mocatta employees stomp their family’s soup tureen and tea set into flattened disks for efficient transport in a barrel. “We had no reason to do otherwise,” he said. “Our job was not art preservation; it was to ship fully-filled barrels of silver to refineries.”6 He had heard rumblings of a corner in silver during his travels promoting Mocatta’s expertise: “Silver traders have started to talk about a topic they find interesting and disconcerting: Can there be a squeeze in silver, and if so, what does this mean?”7

  Jarecki answered the question by writing an article in the March 1979 issue of Euromoney, a popular monthly business and financial magazine with worldwide distribution, concluding that silver could be squeezed because “the low level of above-ground stocks … makes the market vulnerable to physical dislocation.”8 He suggested that there was “far less than a billion ounces” of the white metal in the world, and someone controlling “150 million ounces … might well succeed in achieving the price they ask.”9 He added that a squeeze required “a substantial enterprise willing to undertake a massive silver purchasing program.”10

  Henry may have sounded professorial, which he sometimes could not help, but to advertise Mocatta’s skill he added a practical blueprint for how to do it. His article highlighted “Three Ways to Squeeze the Silver Market” in bold letters like on a highway billboard so that no one could miss the message.11 The three methods were: first, outright purchases of futures contracts on a particular delivery month, say December 1979; second, balanced purchases and sales of different delivery months, called switches, spreads, or straddles, such as buying 150 million ounces of December 1979 futures and selling the same amount of March 1980 futures; and third, the most complicated scheme, unbalanced purchases and sales, such as buying 175 million ounces of December 1979 futures and selling 150 million ounces of March 1980 futures.

  Henry admitted that the simplest method, outright purchases, was potentially the most profitable but was also the most expensive to implement because the good faith margin deposit required by the futures exchanges for outright purchases was much greater than for spreads. And while spreads did not add to the overall demand for the white metal, they did put pressure on the so-called long leg of the straddle, December in the example, forcing the shorts to deliver silver during that month. Jarecki promoted spreads as the best way to squeeze the market but warned of the danger when the speculator wanted to capitalize on the price increase. “The problem is that if he then wants to sell, his selling, and that of those who watch his activities, rapidly causes the price to fall; the price shoots downward even more rapidly than it rose.”12 He cited the price decline of 1974 after the Hunts stopped buying to illustrate the speculator’s problem and suggested the more prudent unbalanced purchases and sales as the best strategy. Henry never disclosed how to avoid losses but advertised his expertise to do the job: “This route obviously takes the greatest amount of skill and (need one add?) the involvement of experienced market professionals.”13

  Henry had no interest in cornering the silver market but wanted the commissions the Hunts would generate in the process. In retrospect, he says the Euromoney article was “essentially an ad for Mocatta saying to the Hunts, ‘You want to do this? Come and talk to us.’ ”14 Henry was never accused of aiding and abetting a squeeze because, he says, “The Hunts followed my roadmap to the letter with one exception: they didn’t ask us to help them.” He then adds, “Not calling us might have been their biggest mistake.”

  Bunker and Herbert Hunt did not follow Henry Jarecki’s blueprint “to the letter,” but they paid close attention. On Friday, May 18, 1979, Herbert wrote to Scott Dial, a commodities broker with Clayton Brokerage in Dallas, who he had done business with before: “Certainly appreciated receiving the copies of your talk and the article by Dr. Jerecki [sic]. Had the opportunity to read both of these last night and found them extremely interested [sic].”15 During subsequent courtroom testimony Herbert did not recall reading the Euromoney article, despite his letter to Dial, which he pointed out had not been signed, but the Hunts changed their trading strategy going forward in a number of ways, including using straddles for the first time, option two in Jarecki’s list.16 They also abandoned their pursuit of the Sunshine Mining Company in June 1979, after the company’s management rejected their takeover price as inadequate.17 Bunker could have continued to battle by raising his bid but he no longer needed Sunshine’s cover to avoid potential speculative limits on trading. He had new partners with money to spare to pursue the white metal.

  On Tuesday, July 24, 1979, the Hunts quietly entered into an agreement with two Saudi businessmen, Sheikh Ali bin Mussalem and Sheikh Mohammed Aboud Al-Amoudi, establishing the International Metals Investment Company, known as IMIC, a Bermuda-based company with the objective of accumulating silver.18 The two sheikhs were wealthy but their main attraction to Bunker and Herbert came from their friendship with fellow Jeddah resident Prince Faisal, son of Crown Prince Abdullah, commander of the Saudi National Guard.19 Mohammed Affara, the man who brought the two sides together, told Herbert that “Sheikh Ali was involved in representing the Saudi Arabian government.”20 The Hunts paid Affara a finder’s fee of $1 million for a
ccess to the royal court.21 It gave the Hunts ammunition to stoke the already explosive surge in silver prices, which had increased above $9 for the first time earlier in July, reflecting the growing frustration with economic and political conditions in America.

  The annual rate of inflation in the United States had accelerated to over 13% during the first six months of 1979, a new peacetime record, forcing President Jimmy Carter into a ten-day stay at Camp David, the presidential country retreat in Maryland’s Catoctin Mountains, for consultations with a cross section of Americans, including industrialists, labor leaders, economists, and pastors (not necessarily in that order).22 Anyone coming to Camp David by car endured the double indignity of higher gas prices and long lines of cars snaked around service stations waiting to get to the fuel pump. The president blamed the gas shortage on “less oil than expected coming from Iran” since the Khomeini revolution, but one angry Massachusetts motorist broadened the blame: “Jimmy Carter … ought to hit those Texans and sheikhs who started this mess.”23 The press commented, “Until President Carter comes up with new energy and inflation policies the uncertainty that has dominated the precious metals market … is likely to continue.”24 But instead of offering a credible plan to reassure the public, Carter descended from his mountaintop retreat and gave a thirty-three-minute talk to the nation that made Jeremiah, the Biblical prophet of doom, sound like an optimist. He said that the emerging “crisis of confidence” was “a fundamental threat to American democracy” and continued as though he were on Bunker’s payroll: “The phrase ‘sound as a dollar’ was an expression of absolute dependability until ten years of inflation began to shrink our dollar and our savings.”25

  Investors worry when the president of the United States bad-mouths the U.S. currency so they paid special attention to the Wall Street Journal headline on September 6, 1979, a day after traders returned from the Labor Day weekend and silver breached $11 an ounce: “Gold, Silver Prices’ Unfathomable Surge Stirring Rumors of ‘Big Money’ Invasion.”26 The article dismissed “rumors of manipulation” as premature and quoted Norton Waltuch, a member of Comex and director of ContiCommodity Investor Services, a major futures brokerage firm, pointing to economic fundamentals: “Just look at the vast pools of money floating around the world. Paper currencies are declining. People who have it have to put their money somewhere.”27 Waltuch knew what he was talking about, having led the bidding for silver on the Comex trading floor and, according to the Journal, was “instrumental in spurring prices skyward.”28 Norton refused to identify his clients, but the press cited “widespread belief among speculators that Arab interests” are behind the accumulation.29

  Norton Waltuch, bald except for a fringe of black hair skirting the crown of an egg-shaped head, had been manager since 1970 of the New York branch office of ContiCommodity Services, the brokerage subsidiary of Continental Grain, a family-run commodities giant founded in Belgium in the nineteenth century. The growth in futures markets during the second half of the 1970s helped Waltuch become a major revenue producer for the company but the explosion of silver prices after the 1979 Labor Day holiday turned the stocky trader into a movie star. According to the Wall Street Journal his mere “presence on the Comex floor, whether he is buying contracts or just watching, has been enough to send prices soaring.”30 An eye witness recalls that traders posted clerks along the hallway leading to the trading room, a cavernous structure housing Comex and her sister exchanges on the eighth floor of Four World Trade Center, to gain an advantage before Waltuch arrived.31 A glimpse of his yellow trading jacket emerging from the elevator would start a price rally in the silver ring. Some spotters went to the seventh floor, where ContiCommodity offices were located, for an additional edge, watching if he took the elevator up to trade or down for lunch.

  Waltuch sounded as though he were visiting the dentist’s office when Alabama Senator Donald Stewart extracted the identity of ContiCommodity’s clients during testimony at one of many subsequent congressional hearings on silver.32

  STEWART (S): Could you tell us where the Arab participants … came from?

  WALTUCH (W): Are you asking me Senator?

  S: Yes.

  W: I met one Saudi Arabian, and two or three Lebanese.

  S: What is the name of the Saudi Arabian?

  W: Mr. Fustok.

  S: Could you give me the name of the other individual?

  W: Mr. Nahas is a Lebanese, although he is a Brazilian citizen.

  S: Where did you meet these people?

  W: Mr. Fustok in Paris. Mr. Nahas in Geneva.

  Senator Stewart then searched for a connection between the two men.

  S: Was anybody else present in the meeting besides you and these individuals?

  W: Well, when I had the meeting with Mr. Fustok, Mr. Nahas was present. When I met with Mr. Nahas there were two people from a company called Advicorp, which is a Geneva based management company.

  Advicorp represented Mahmoud Fustok, so the senator probed further.33

  S: Have you ever met Nelson Bunker Hunt?34

  W: Yes.

  S: Where and when did you meet Mr. Hunt?

  W: I met him once in Kentucky … in July [1979].

  S: That is all that took place during that particular period of time?

  W: No … I met him again in September in Paris and in October in Zurich.

  S: What did you discuss at those meetings?

  W: Well … he was picking my brain and asking me what I thought about silver.

  S: Did you solicit his account at that time?

  W: No, sir.

  S: Did you indicate to him at all that you were … trading for other accounts at that time?

  W: Well anyone who follows the financial pages would know that I was greatly involved in silver.

  S: Who else was involved at that time in those meetings?

  W: Mr. Nahas was present.

  S: Who else?

  W: That is all.

  Senator Stewart had just identified Waltuch’s most important client, Naji Nahas, closing the loop that began in Paris on October 1, 1978. The CFTC later charged that Nahas and Bunker Hunt were “the principal axis of communication and coordination” in the scheme to corner the market for the white metal.35

  Silver manipulators needed more than just communication and coordination to drive up prices without getting caught by the authorities. Increased global tension in the second half of 1979 covered their tracks by boosting the safe haven demand for gold, which spilled over into silver. On Tuesday, September 18, 1979, a historic jump in prices began in Hong Kong, while New York still slept, and spread with the sunrise to Europe and America, registering new world records in every trading center.36 No one could explain exactly what had triggered the explosion but Rainer Gut, chief general manager at Credit Suisse Bank, pointed to a simmering international pressure cooker: “With political changes in Iran, the whole Middle East had become more fluid and unstable. We don’t know what might happen in Saudi Arabia and other areas around the Persian Gulf. So, we’re observing Middle Eastern buyers moving out of dollars and other paper currencies into gold.”37 The chief economist of the Salomon Brothers investment bank, Henry Kaufman, known as Dr. Doom for his dire predictions for inflation and interest rates, said: “In effect it’s a vote against the established economic and financial system.”38

  The increase in gold by almost $25 an ounce to $376 in New York on September 18 made front page headlines in the Washington Post: “Frenzied Trading Sends Gold Price to Record High.”39 The 6.7% overnight jump delivered a message to political leaders, according to the Post: “Investors big and small … doubt governments have the ability or willingness to control the inflationary spiral.”40 Gold sent the message, but the price movement on September 18, four times larger than its normal daily price volatility, resembled a plodding freight train compared with silver’s Amtrak express.41 The white metal rose almost $2 an ounce to close at $15.78 on September 18, a spectacular 12.7% overnight jump, almost d
ouble the percentage change in gold.42 The press described the yellow metal as the price leader and suggested that silver “soared sympathetically,” but the normally more volatile white metal became a lightning rod for trouble.43 The Wall Street Journal wrote, “Chaos has struck the silver market,” and quoted one trader saying, “The market is out of control. People are really going to get hurt.”44 Which is why Bunker and Herbert Hunt visited Henry Jarecki to check on their business arrangement.

  The Hunts had borrowed $50 million from Mocatta, a loan they had taken out to buy more silver when it was selling for about $5.50 an ounce, and had left 10.7 million ounces of the white metal with Mocatta as collateral. The $10 price increase since then gave the Hunts a billion-dollar profit on their 100-million-ounce accumulation but spawned rumors that Jarecki had been caught short, as in 1974, and the Hunts worried about the safety of their collateral.45 The gossip had reached Washington, D.C., where a member of the CFTC said, “How did Henry get caught short? Usually he’s a little smarter than that.”46 If Mocatta went bankrupt, the Hunts would have to stand in line with other creditors to get their precious metal back, so they wanted to repay their loan and take their bullion, which turned out to be as complicated as putting a man on the moon.

  Herbert surprised Henry by arriving unannounced with his attorney Bart Couzins at Mocatta’s office on the fifth floor of Four World Trade Center. Henry was sitting at his desk in a glass-walled booth talking on the phone to a friend in London and blurted out, “My God, the Hunts have just walked in.”47 But no one agrees what happened after that. Herbert recalls, “Jarecki was in complete turmoil; he was getting eaten alive by margin calls. … Bunker and I had put up 10.7 million ounces of silver … for which we had obtained loans of $50 million. … But suddenly I discovered he had hocked our silver for as much as the banks would loan him—about $185 million, I believe.”48 Herbert called Bunker in Dallas and said, “You better come up here and look after your own interests.”