Silver’s siren call to the Über-Rich

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Highlights this week

Gold drops $100 from last week’s 6-month high…

Fails to spur Asian demand, Shanghai at discount to London…

Silver falls 11% from late-February, back under $20…

There have in living memory been two plain attempts to buy a controlling share of the global silver market.

Texas oil barons the Hunt brothers tried to corner silver in the late 1970s. Investment legend Warren Buffett tried something similar in the mid-1990s. Both were fabulously wealthy at the time, pretty much the richest men in the world, in fact.And both were, to some extent, successful, forcing prices higher both by tightening available supply to the market, and by spooking other speculators into joining that trend.

Buffett got out with his profits intact (never saying how much he made, he has admitted to selling “too early”). But the 1980 campaign to deny the Hunts their corner helped destroy the price. Double-digit interest rates on cash did the rest. Together with their own mistakes, that destroyed their fortune.

So what links silver, Buffett and the Hunts? What is it about the “poor man’s gold”thatmakes the richest men in the world want to corner it?

The obvious answer is greed. Less obvious, but vital, is that silver it might be possible. Silveris a relatively small market, certainly compared to gold or other industrial metals.Latest data from the London bullion market, where Warren Buffett took delivery of physical silver bars for Berkshire Hathaway’s late 1990s’ investment, says gold trading outdoes silver trading more than 9-fold by Dollar value on average. In the US Comex futures market, where the Hunt brothers got burnt having leveraged their position with borrowed money, the value of open interest – the amount of outstanding contracts – ended February 3 times greater in gold than in silver.

So cornering the world’s silver supplies (or enough for it to matter) might seem feasible. And at their peak, the Hunts controlled 230 million ounces, worth some $14 billion and equal in value to 1980′s entire UK state pension spending according to Stephen Fay in his excellent history of the affair, Beyond Greed. Within two decades, Buffett’s Berkshire Hathaway took delivery of 130 million ounces, then some 80% of annual silver mine supply. Yet with the price falling so sharply from the 1980 peak, and with other financial markets growing like topsy meantime, that position was worth just 2% of BRK’s total portfolio.

More deeply, however, the true cause of all “market corners”,according to Jesse Livermore, the legendary ‘Boy Plunger’ of a century ago,is in fact vanity.Livermore’s memoirs (channeled through author Edwin Lefevre as Reminiscences of a Stock Operator) repeatedly name vanity as the speculator’s own worst enemy.

It’s hard to imagine the saintly Warren Buffett falling victim. Surely there’s no room for self-regard alongside all that apple pie, Cherry Coke and deep value investing?But for the Hunt brothers, who blew the silver price out to $50 per ounce in January 1980, vanity can’t be argued.

To defend their fortune against inflation (and other Communist plots), the über-rich oil barons tried to corner silver because they thought they could. But they were wrong. Instead, the Hunts’ price spike brought untold quantities of silver to market, both from existing stockpiles at wholesale dealers but also from private holdings of plate, tableware and jewelry. Fine silverwork was lost to the smelting pot because the spot price of raw metal on a few days one January beat the value of art and history forever.

Fast forward to March 2014, and the falling silver price says no one’s trying to buy and control the world’s silver supplies today. The most recent flood of scrap metal, unleashed by the trip back to $50 per ounce in spring 2011, also continues to recede. But might lower prices, in time, entice a newly rich speculator, perhaps from a precious metal-loving emerging economy, to try their hand?

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  • Charles Savoie

    Huh? Where’s this fellow’s documentation that the Hunts attributed inflation to “Communist plots?” Reading his blog it comes strongly to me he’s on the side of the shorts. He made this allegation about the Hunts, inflation and Communism—now let him supply documentation from the USA newspaper archives to prove it. Hearsay won’t do. No, he just lobs things that smell and scurries off, not anticipating anyone to insist on proof. You’re a character assassin. No wonder his name is evocative of things that burn. The start-up backers of Bullion Vault tell the story here. People don’t just blindly trust commentary from self appointed experts. Many are on the scene merely to spread bearish sentiment intending to create a self fulfilling prophecy by inculcating fear of another price collapse. You’re being enticed by a siren song to ditch your metal at gutter rates. Storage? People—who can you trust, more than you trust yourself? I’ll be watching to see how long this post lasts, or if it even makes it to being posted. London is the most frightening place on Earth as regards the long side of silver. Everyone in The City hates silver as if it had crucified their sons and daughters!