Cornering the Market

It has been over a quarter of a century since the Hunt brothers set out to corner the market in silver and actually succeeded in running the price up to near $50/ounce, a staggering sum back then, when three ounces of silver sold at that price would have fed a family of four lavishly for a month.

It was just good, clean, Texas fun, and word has it that the boys actually hoped to profit not so much by squeezing jewelers and film manufacturers but primarily from a new, very rich, silver mine they were keeping under wraps. One that has never been opened. This makes sense; big money and old money tend to think generationally and those families which don’t, end up back in whatever cow byre or hick town they came from. Miss a chance this generation, that’s fine, because the opportunity will return in time and descendants will have been taught how to profit from it.

Long-running examples of success include the Rothschilds, Barons von Reuters, Rockefellers, and Krupps. A splendid example of doing it wrong is the Kennedy family, where too many relatives have been living off what Papa Joe made running rum and getting his boys into politics, with occasional useful marriages. The hubris and complacency are still there, as witness Caroline Kennedy thinking she could become the Senator from New York simply by telling the Governor she wanted the custom-made chair. Never mind that she doesn’t even vote! She’s a Kennedy, after all, and lived in the White House half a century ago, surely qualification enough. Not in this century, dear.

In the fullness of time the Hunts will no doubt go into production if the tale is true, and my surmise is that they are watching the manipulations of J. P. Morgan Chase with avid, probably amused, eyes. If it is apocryphal, it still isn’t safe to be short 20% of the world’s annual silver production in times of rising demand and falling output.

Back in the days of Andrew Jackson the ratio of silver to gold was set at 16:1, although throughout previous history 10:1 was more common, demonstrating that Old Hickory could keep his eye on acquiring extra Pine Tree shillings as well as FDR and RMN did. My read is that the highly anomalous ratios of sixty and even seventy-plus to one are the result of “judicious” short-selling by JPMC and a couple of confederates. It takes a while to become short 20% of a year’s output, and the others account for at least 10% more. There is a big backlog of inexorable demand.

It doesn’t matter much what the manipulators hope to gain by this reckless course of action for this discussion because the parts that interest us are the difficulty anyone short will have in delivering physical silver and what happens when the yo-yo springs back into our hand. Any change in the ratio will redound to our benefit, and a full snap back to 16:1 would literally quadruple the value of our holdings. Silver closed at a neat $18.00 last Friday, and the ratio does not have to return to traditional standards to make me smile. Even 30:1 will more than double the value of our stockpiles and that rise will make our silvery beauty even more desirable to investors, and concomitantly more dangerous to anyone short my favorite metal.

Should there be new readers who do not understand what “selling short” means, it refers to having your broker sell something which you do not own, on the vague promise to replace the stock or commodity “bambaya,” “By and by, yes?” as we say in Hawaii. If the value of what you sold rises, instead of falling, you will be required either to replace what you sold without owning it or to deposit enough in your account to cover the current cost. Those were the dreaded “margin calls” which led to leaps from windows, back when those opened in office buildings.

It makes one wonder, does it not, what could be so important about keeping the price of silver depressed for firms to take such risks, even if they will probably be deemed “too big to fail?” This is far worse than selling a piece of paper representing a share in Google or ADM. Those things are for sale any time, although one might not like the price. Physical silver must both exist and be for sale.

What Morgan has done is sell something it might not be able to purchase at anything like the prices they have managed to keep submerged. Sure, all last year they held prices in a beautiful little rising channel that offered constant upside movement followed by predictable downside potential, and even now if you are certain you understand the game, you might want a piece of the action. I’m not certain any more, and an expert technical analysis friend says he won’t be interested unless it breaks below seventeen. I wrote recently that if one did not own physical silver to grab some the next time it touched 16 1/2. I don’t expect it to see sixteen again any time soon, and I would pounce at $16.31 if I wanted some. My views on buying silver permeate my archives, here and elsewhere.

Let me repeat: some actions simply are not safe. I could attempt to sell the Star of India short, but I would have no way of covering; it is part of the crown jewels of England, and if I were the Queen my royal ladies in waiting would pry it out of my hand every night after I fell asleep. Phoo on the tourists; let ’em look at a replica. Chances are they can’t tell the difference between diamonds and CZ anyway. Laughter…chances are that what is on view in the Tower of London IS a phony, at the insistence of Lloyd’s of London. They haven’t stayed in business all of these centuries by taking foolish chances.

There is a limited, discreet, quantifiable amount of silver produced every year (more and more as a byproduct of mining for gold and Japanese sewers, Byron King tells us) and surely Morgan is betting that when the time is right it can pick up the physical metal necessary for less than it made selling short. We aren’t certain what else they’re gambling on. One of the year’s delightful scandals was the empty vaults that were pledged to contain gold and silver in specific accounts while the clients were being charged large storage fees. For that matter, Ft. Knox hasn’t been audited since before I was born, and I don’t place a great deal of credence in the theory that it safeguards some four hundred billion at current prices. Most of what is traded on ‘change these days is promises or shares in mines. Which don’t pay dividends in product.

I’m a “Contrarian,” of course, and my call is that investors (egged on by the government with its fudged, fraudulent data), may doodle around for a brief while attempting to convince themselves that the jobless, consumerless, productionless “recovery” is real, but that sanity will reassert itself and metal will resume its rise. I wouldn’t even give that proposition until Election day to manifest itself–although there should be some nice buying opportunities then if the Statists are rejected as thoroughly as seems probable at the ballot box. By early next year I predict soaring metal prices as a result of the realities of new and higher taxes and energy costs. That’s an easy call: up because times are grim, down because Congress changed hands (maybe), then up as all that hope and change hits paychecks still going out and a new round of pink slips arrives. There should be a whing-doozy of a sell-off in December to avoid Cap Gains going from 15% to 20% and the socialistic medicine bite 3.84% tacked on top of that come 1 January 2011.

Gold is beautiful and symbolic and has some industrial uses, but silver is the most superior conductor of heat and electricity and has long been a strategic commodity. Signature chuckle…considering how many products, military and commercial, are made in China, my first impulse was a laughing, “Where to get enough silver is China’s problem now!” but that isn’t the real situation. The Chinese will have no difficulty raising prices to adjust for problems obtaining supplies.

I’m as big a Silver Bug as ever was and my silver is all physical and none of it is for sale, period, until a prospective buyer offers me what I want for it, which is land. I’m also on the Doom & Gloom bench permanently and expect the day to come when the land I want is available at a price I am glad to pay–in silver. I remain as convinced of the increasing “value” of precious metals as I have always been, for more reasons than our mantra: “Fiat currency doesn’t tell you the price of metal; metal tells you the value of fiat currency.”

Linda Brady Traynham
Whiskey & Gunpowder

August 2, 2010

The Daily Reckoning