The Story of Silver

by William L. Silber

  CHAPTER 16: HEAVYWEIGHT FIGHT

  1. The record of Hunt transactions reported here is based on congressional testimony by Charles Mattey, a vice president at Bache & Company and president of the Commodity Exchange, in Senate Committee on Agriculture and Forestry, Commodity Futures Trading Commission Act: Hearings on S. 2485, S. 2578, S. 2837, H.R. 13113, 93d Cong., 2d sess., pt. 2, May 16,17, 20, 1974, pp. 475–76, 481(which reproduces an article from the financial weekly, Barron’s, dated February 11, 1974). The record is confirmed in testimony by William Bledsoe, a former Hunt employee, in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions.” The industrial use of silver in France is in Handy & Harman, Silver Market in 1972, p. 20.

  2. The CRB database is the source for the December Comex futures contract. The profit was calculated as follows: The average daily closing price of the December contract during November 1973 was $2.865. The closing price on December 3 was $3.04, for a difference of 17.5¢ per ounce. Multiplying 17.5¢ by 20 million ounces produces $3.5 million.

  3. Bache took delivery of 1,071 contracts on the first delivery day of December, according to Ron Scherer in “Who’s Trying to Corner the Market in Silver?” Christian Science Monitor, December 12, 1973, p. 10. According to Securities and Exchange Commission, The Silver Crisis of 1980: A Report of the Staff of the U.S. Securities and Exchange Commission (Washington, DC: 1982), pp. 50–51, Bache took delivery of five million ounces for the Hunts in December 1973. Part of the discrepancy may be due to the incorrect use of 5,000 ounces per contract assumed by the SEC staff study, which did not go into effect until September 1974. In December 1973 the contract size was still 10,000 ounces, so the contemporary report of 1,071 contracts by Ron Scherer makes it at least 10 million ounces. In addition, the SEC mentions other brokerage houses—Reynolds Securities—that did business for the Hunts, so part of the 20 million ounces may have been delivered there.

  4. This quote and the remainder in this paragraph are from “Who’s Trying to Corner the Market in Silver?” Christian Science Monitor, December 12, 1973, p. 10.

  5. This quote and the remainder in this paragraph are from Richard A. Donnelly, “Commodities Corner,” Barron’s, February 11, 1974, reprinted in Senate Committee on Agriculture and Forestry, Commodity Futures Trading Commission Act, pp. 480–81.

  6. Note 2 above gives $2.865 as the average price of those November purchases, so with cash silver selling at $5.37 (CRB database), the per ounce profit is $2.505 times 20 million ounces, which equals $50,100,000.

  7. The $6.70 price is for cash silver from the CRB database.

  8. The total of 50 million ounces during the 1973–1974 period was confirmed in testimony by William Bledsoe, in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 558.

  9. Donnelly, “Commodities Corner,” p. 481.

  10. The quote is from “Precious Metals Post Price Gains: Silver and Platinum Futures Follow Activity in Gold,” New York Times, February 9, 1974, p. 41. Gold prices for December 3, 1973, and February 26, 1974, are from the cash gold price in the CRB database.

  11. This quote and remaining in this paragraph are from The Congressional Record—House, February 28, 1974, p. 4803.

  12. Senate Committee on Agriculture and Forestry, The Commodity Futures Trading Commission Act of 1974: Hearing, November 15, 1974, p. 122.

  13. “Who’s Trying to Corner the Market in Silver?” Christian Science Monitor, December 12, 1973, p. 10.

  14. See Testimony by Henry Jarecki in House Committee on Agriculture, Commodity Futures Trading Commission Act of 1974, Hearings on H.R. 11955, 93d Cong., 2d sess., pt. 2, January 23, 24, 29, 30, 31, 1974, p. 190.

  15. For details on marketmaker behavior, see William L. Silber, “Marketmaker Behavior in an Auction Market: An Analysis of Scalpers in Futures Markets,” originally published in Journal of Finance 39, no. 4 (Sept 1984): pp. 937–53, and reprinted in Futures Markets, ed. A.G. Maliaris (Edward Elgar Publishing Co., 1997).

  16. This quote and the remaining story in this paragraph are based on Jarecki Manuscript, chap. 8, pp. 9–10, supplemented by Jarecki interviews.

  17. Jarecki Manuscript, chap. 9, p. 14.

  18. The five-million-ounce short position is from Jarecki Manuscript, chap. 8, pp. 24–25. Jarecki recalls that he had a multimillion-dollar loss, which I estimate as follows: The price of silver on February 26, 1974, was $6.70 and Jarecki (chap. 8, p. 24) writes that he was short at an average price of $2.00 an ounce, which means a loss of $4.70 per ounce. Multiplying $4.70 by 5,000,000 equals $23,500,000.

  19. Jarecki Manuscript, chap. 8, p. 25.

  20. Ibid.

  21. Ibid., chap. 8, p. 26.

  22. This discussion and the remaining in this paragraph are from ibid., chap. 9, pp. 5–6.

  23. Hurt, Texas Rich, p. 325.

  25. Ibid., p.128.

  24. Economic Report of the President, Transmitted to the Congress, February 1975, together with the Annual Report of the Council of Economic Advisers (Washington, DC: Government Printing Office, 1975), p. 304.

  26. The discussion in this paragraph is based on Bledsoe testimony in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 560; and the discussion in Hurt, Texas Rich, p. 324.

  27. The quote is from http://www.au.af.mil/au/awc/awcgate/navy/log_quotes_navsup.pdf.

  28. Jarecki Manuscript, chap. 14, pp. 1–4.

  CHAPTER 17: SAUDI CONNECTION

  1. For biographical details see “Ibn Saud, Arabian Ruler, 73, Dies; Won Desert Kingdom with Sword,” New York Times, November 10, 1953, p. 1; “Ibn Saud, Ally in War, Dies; Ruler Built Modern Arabia,” Washington Post, November 10, 1953, p. 14; and “The Saga of Ibn Saud,” Boston Globe, November 15, 1953, p. C7.

  2. According to Arthur N. Young, “Saudi Arabian Currency and Finance,” Middle East Journal 7, no. 3 (1953): p. 365, there were 270 million silver riyals outstanding in 1952, each containing .34375 troy ounces of silver, giving a total of 92.8 million troy ounces of pure silver. The population of Saudi Arabia in 1950 was 3.8 million (see http://www.bluemarblecitizen.com/world-population/Saudi-Arabia), which comes to 24.4 troy ounces per capita, or 2 troy pounds per person.

  3. Young, “Saudi Arabian Currency,” p. 369.

  4. See Arthur N. Young, “Saudi Arabian Currency and Finance: Part II,” Middle East Journal 7, no. 4 (1953): pp. 539–56.

  5. Ibid., p. 539.

  6. See Bledsoe testimony in House Committee on Government Operations, “Silver Prices and the Adequacy of Federal Actions,” p. 558, for the Iran trip and the plan for the trip to Saudi Arabia.

  7. “Faisal, Rich and Powerful, Led Saudis into 20th Century and to Arab Forefront,” New York Times, March 26, 1975, p. 10.

  8. See “King Faisal Slain by Nephew,” Los Angeles Times, March 25, 1975, p. 1; and “Hint Revenge Motive in King’s Death,” Chicago Tribune, March 26, 1975, p. 15.

  9. Harold Drake, “Silver,” in U.S. Bureau of Mines. Minerals Yearbook 1977, vol. 1, Metals and Minerals (Washington, DC: Government Printing Office, 1980) 1, p. 829 (table 1), available at https://catalog.hathitrust.org/Record/003909435.

  10. “Hunts Making Offer for Sunshine Mining,” New York Times, March 22, 1977, p. 64. The Hunts bid $15.75 per share for up to 2 million shares. There were 5.8 million shares outstanding.

  11. Patrick Ryan, “Silver,” in U.S. Bureau of Mines, Minerals Yearbook 1965, vol. 1, Metals and Minerals (except fuels) (Washington, DC: Government Printing Office, 1966) 1, p. 831, available at https://catalog.hathitrust.org/Record/003909435.

  12. For discussion of the fire see “Steel Union Aide Assails Company in Idaho Mine Fire,” New York Times, May 16, 1972, p. 8; and for the strike and aftermath see Drake, “Silver,” Minerals Yearbook 1977, p. 830, available at https://catalog.hathitrust.org/Record/003909435.

  13. “Sunshine Mining: Why Hunts Want It,” New York Times, June 24, 1977, p. 7
6.

  14. The CBOT introduced silver trading on November 3, 1969, according to Handy & Harman, The Silver Market in 1969, 54th Annual Review (New York, 1970), p. 11.

  15. See William Silber, “Innovation, Competition and New Contract Design in Futures Markets,” Journal of Futures Markets (Summer 1981), for a discussion of first-mover advantages in futures markets, including silver.

  16. This paragraph is based on information in “Commodity Agency Accuses 7 Hunt Heirs of Violations in Soybean-Futures Trades,” Wall Street Journal, April 29, 1977, p. 36.

  17. Fay, Beyond Greed, p. 75.

  18. “Commodity Agency Accuses 7 Hunt Heirs of Violations in Soybean-Futures Trades,” Wall Street Journal, April 29, 1977, p. 36.

  19. See “Court Frees Hunts to Act on May Soybean Deliver,” New York Times, May 13, 1977, p. 84; and “U.S. Wins Suit against Hunts as Court Backs Curb on Futures Holdings,” New York Times, June 8, 1977, p. 85. Also see Jerry W. Markham, Law Enforcement and the History of Financial Market Manipulation (Armonk, N.Y.: M.E. Sharpe, 2014), pp. 174–75.

  20. See Markham, Law Enforcement, pp. 175–77, for a discussion of the conflict between the CFTC and the CBOT over regulatory issues in connection with the March 1979 wheat emergency.

  21. Fay, Beyond Greed, pp. 73–74.

  22. See “Silver Futures Follow Soybean Lead,” New York Times, August 21, 1976, for Bunker Hunt’s desire to move silver to the CBOT warehouses to avoid the Comex-approved Iron Mountain Depository owned by Mocatta Metals.

  23. The CBOT contract was always for 5,000 ounces. Comex reduced the size of its contract from 10,000 ounces to 5,000 on September 27, 1974.

  24. Deposition of William Herbert Hunt, Minpeco S.A., et al., Plaintiff, against Nelson Bunker Hunt, et al., Defendants, October 29, 1986, p. 143.

  25. Cash silver in the CRB database was $6.125 on October 26, 1978, the first time it broke through the six-dollar level since May 14, 1974, when it was $6.06.

  26. Cash silver traded at $3.85 on January 20, 1976. Cash gold was $130.40 on February 2, 1976, and reached $225 on October 10, 1978.

  27. “Alleged Easy Winner in l’Arc de Triomphe,” Los Angeles Times, October 2, 1978, p. D10.

  28. This discussion is based on Fay, Beyond Greed, pp. 81–84, 94–100; and the testimony by Norton Waltuch in Senate Subcommittee on Agricultural Research and General Legislation, “Price Volatility in the Silver Futures Market,” Hearing, 96th Cong., 2d sess., pt. 2, June 26, 1980.

  CHAPTER 18: SILVER SOARS

  1. The 6.2% return of silver on February 5 is statistically significant given the 1.3% standard deviation of daily returns over the previous 90 calendar days. As always, I used cash silver prices from the CRB database to run the significance test.

  2. “Gold Prices at Record in Near-Panic Buying,” New York Times, February 6, 1979, p. D12.

  3. “Khomeini Arrives in Teheran; Urges Ouster of Foreigners; Millions Rally to Greet Him,” New York Times, February 1, 1979, p. A1.

  4. “A Prophet Returns to His Own Land—With Honor,” New York Times, February 4, 1979, p. E1.

  5. Jarecki Manuscript, chap. 8, pp. 15–16.

  6. Ibid.

  7. Henry Jarecki, “A Squeeze in Silver: How Likely?” Commodities Magazine, March 1979, pp. 56–58.

  8. Henry Jarecki, “Silver Threads Among the Gold,” Euromoney, March 1979. This quote is on page 149.

  9. Ibid., p. 139.

  10. Ibid., p. 149.

  11. Ibid., p. 142.

  12. Ibid.

  13. Ibid.

  14. This quote and the next are from Jarecki Manuscript, chap. 9, pp. 11–12.

  15. Herbert Hunt’s letter and related material is from the 1988 trial Minpeco S.A. v. Nelson Bunker Hunt, et al. The correspondence from plaintiff attorney Mark Cymrot to Judge Lasker, dated April 15, 1988, includes a copy of the letter from Herbert Hunt to Scott Dial.

  16. The Hunt use of straddles for the first time is referenced on page 2 of Mark Cymrot’s letter to Judge Lasker and in CFTC Docket No. 85–12, Complaint and Notice of Hearing. In the Matter of Nelson Bunker Hunt, et. al., pp. 17–18. The Hunts claim they began using straddles because of tax advantages. See Jeffrey Williams, Manipulation on Trial: Economic Analysis and the Hunt Silver Case (Cambridge, UK: Cambridge University Press, 1995), p. 30.

  17. “Hunt International, Sunshine Mining Co. Settle Their Disputes,” Wall Street Journal, June 8, 1979, p. 24.

  18. CFTC Docket No. 85–12, p. 15.

  19. Harry Hurt III, “Silverfinger,” Playboy, September 1980, pp. 230–31.

  20. Deposition of William Herbert Hunt, Minpeco S.A., et al., Plaintiff, against Nelson Bunker Hunt, et al., Defendants, October 29, 1986, p. 231.

  21. Ibid., p. 304.

  22. See Silber, Volcker, p. 143.

  23. The first quote is in “Gas Crunch Will Hit Entire Nation: Carter,” Chicago Tribune, May 6, 1979, p. 1. The second quote is in “From the Gas Lines; Anger and Frustration,” Boston Globe, June 17, 1979, p. 25.

  24. “Silver Prices Set Highs for Third Day in Row; Gold Increases Slightly,” Wall Street Journal, July 12, 1979, p. 30.

  25. See Silber, Volcker, pp. 143–44.

  26. See “Gold, Silver Prices’ Unfathomable Surge Stirring Rumors of ‘Big Money’ Invasion,” Wall Street Journal, September 6, 1979, p. 30.

  27. Ibid.

  28. Ibid.

  29. “Silver, Gold Futures Soar in Buying by Speculators,” Los Angeles Times, September 6, 1979, p. E15.

  30. “Gold Price Falls in London, Posts Rise in New York,” Wall Street Journal, September 14, 1979, p. 12.

  31. I became a member of Comex in 1984, where I traded gold and silver options, and I recently spoke to a trader who was present in the silver ring during 1979 and 1980. He prefers to remain anonymous but was generous in providing many of the details described below.

  32. The conversation is from Senate Subcommittee on Agricultural Research, and General Legislation, “Price Volatility in the Silver Futures Market,” pp. 28–29.

  33. CFTC Docket No. 85–12, p. 5.

  34. The conversation is from Senate Subcommittee on Agricultural Research, and General Legislation, “Price Volatility in the Silver Futures Market,” pp. 45–46.

  35. CFTC Docket No. 85–12, p. 15.

  36. “Gold Mart a ‘Nightmare’ as Price Jumps $22,” Chicago Tribune, September 19, 1979, p. C1.

  37. Ibid.

  38. “Frenzied Trading Sends Gold Price to Record High,” Washington Post, September 19, 1979, p. A1.

  39. Ibid. The gold price is from the CRB cash gold price series.

  40. Ibid.

  41. The daily standard deviation of returns for gold was 1.5% during the previous 90 calendar days.

  42. The silver price is from the CRB cash silver price series.

  43. The greater normal volatility of silver compared with gold is confirmed by the daily standard deviation of returns of the two metals between 1987–2014, a period when neither metal was controlled by government policy or alleged manipulation. The daily standard deviation of the London PM gold fixing was 1.1% compared with 1.96% for silver during that period, suggesting that silver is normally about twice as volatile as gold. One explanation for this, discussed in the introductory chapter, is that silver is a much smaller market so that exogenous shifts in demand or supply have a bigger price impact. One measure of the relative size of the gold and silver markets comes from futures markets. Data for the Commodity Exchange on December 31, 2014, show a total open interest (total number of contracts outstanding) for gold of 371,646 contracts and a total of 151,215 contracts for silver. These translate into dollar amounts as follows: Gold contracts are for 100 ounces and the price per ounce on December 31, 2014, was $1,199, for a total of $44.5 billion. Silver contracts are for 5,000 ounces at a closing price of $16.25 per ounce, for a total value of $12.3 billion. The quote in the sentence is from “Frenzied Trading Sends Gold Price to Record High,” Washington Post, September 19, 1979, p. A
1.

  44. “Silver Surge Roils Market, So Exchanges Sharply Increase Margin Requirements,” Wall Street Journal, September 19, 1979, p. 38.

  45. For these details see SEC, Silver Crisis of 1980, p. 58n37.

  46. See Fay, Beyond Greed, p. 127.

  47. Ibid.

  48. “Talkfest with the Hunts,” Fortune, August 1980, p. 166.

  49. Ibid., p.167.

  50. In the Jarecki Manuscript (chap. 9, p. 16) Henry writes “Mocatta owned about 40 million ounces of silver,” so the numbers in the text should be doubled. The reason for using 20 million ounces is that the Jarecki Manuscript (chap. 9, p. 21) also claims “the EFP deal caused our position to go almost to zero.” As described later in the text, the EFP involved 23 million ounces of silver.

  51. For a detailed discussion of how hedging properly with futures contracts accounts for interest on variation margin payments see Stephen Figlewski, Yoram Landskroner, and William Silber, “Tailing the Hedge: Why and How,” Journal of Futures Markets (April 1991).

  52. “Talkfest with the Hunts,” Fortune, August 1980, p. 167.

  53. See Silber, Volcker, p. 167. The 9% jump on October 1 is significant given the 3.5% standard deviation of daily returns during the previous 90 calendar days.

  54. “Talkfest with the Hunts,” Fortune, August 1980, p. 167.

  55. Ibid.

  56. Ibid.

  57. Also see the discussion in Williams, Manipulation on Trial, p. 38n22, for the role of silver coins as bank reserves.

  58. “Talkfest with the Hunts,” Fortune, August 1980, p. 167.

  59. Interview with Tom Russo, February 15, 2017.

  60. Williams, Manipulation on Trial, p. 33, table 2.2, shows as of August 31, 1979, that the Hunts and IMIC were long 36,815 contracts and short 13,254, for a net long position of 23,561 contracts. Williams (p. 31) also notes that they bought approximately 500 contracts a day between “late” July 1979 through early September. Also see SEC, Silver Crisis of 1980, pp. 27–28.

  61. At the October 29, 1979, Comex board meeting Jarecki said there was no evidence of a “squeeze or a manipulation” with respect to December silver. See Senate Subcommittee on Agricultural Research, and General Legislation, “Price Volatility in the Silver Futures Market,” p. 484.