Silver Tales

Nice move in silver today. We are now in uncharted waters. I think what happened long ago with “Bunky” Hunt was just noise. We are at the high. This was going to happen sooner or later, so no big surprise. I do wonder, “Why today?”

The inflation numbers were a tad hotter then expected. The news from the Mid East was unsettling. I heard some guys talking on TV that those stories are what made silver yank higher. I doubt that.

Gold was up only .7%, silver +3.6%. The currency markets did not move much and bonds were up 10 ticks. Today just happened to be “silver day”. For sure the background story was all about the upside. Even guys like me have been writing that backward = bullish.

I think today’s move was a big spec (or two) putting real money on the table getting long (or longer). Keep in mind that silver is not such a big contract. There are (at least) two-dozen names that have the ammo and the balls to kick silver up a few notches.

The March and May contracts both traded actively and ended at 31.74. This means there is no cost to roll a position. I clear incentive to get long. For leveraged players the “no carry” trade is a place to go.

I like this result. The market(s) have been way too quiet of late. A win for the hot money in silver will just create the opportunity to lean on some other vulnerable market that is set for a nice move. Gold and crude sure come to mind. Long bonds of all stripes are on the list.

Speaking of crude, look what is being paid for physical delivery down in the Gulf. The WTI is simply not telling the story of what energy is costing us. $4 gas is staring us in the face with this crude cost:

 

Old Story

For about a year or so back around 84 I ran Citybank’s (now C) bullion vault at 399 Park Avenue. This was just a corporate screw-up. The guy who had management responsibility for the vault got transferred to Hong Kong and so there was a hole in the Org Chart. I was running other profit centers and that was working out so they gave me another. Fortunately for me there were two guys who ran the vault and did a fine job at it. There was a lot of money to be made receiving/storing/shipping bullion.

One of the things I did was take people down to give a tour.  It was a pretty good show. In my mind's eye it was as big as a basketball court. There were sections that had gold and palladium. Tons of it. But the staggering thing was the silver. It was piled in 200lb bars up to ceiling. They moved it with big forklifts. Hard to describe the scope of it.

This was Bunker Hunt's silver. It was a good chunk of the 100mm ounces he bought.

The Hunt story blew up in late 79. Keep in mind that numbers then are like today except add another zero. Citi was a very big lender to the Hunts ($115mm). First Chicago was out $70mm. National Bank of Dallas had syndicated a loan for $450mm. All the banks had a chunk of that swill. The worst part was the broker loans. Pru Bache had margin loans of $200mm Hutton another $100mm and the idiots at Merrill had a $500mm out on margin.

So this was a systemic problem. (Again, a rounding number today)

Paul Volker had taken over the Fed just a few months before all this happened. Inflation was raging at the time. It was his intention to shut that down and he ultimately did. And along the way he killed the Hunts. He also killed the banks that financed the Hunts. He told the banks to eat the losses and store the silver until it could be sold without consequence. Volker played hardball with the likes of Walter Wriston, and they all backed down. Paul made his “rep” at the expense of the Hunts.

The run up in silver (and gold) made Volker look bad. The PMs were the daily signs of his inability to rein in inflation. So he crushed them. Volker set the stage with this one. It was understood that he was not to be messed with. Later he crushed the bond market. All that because inflation got a bit out of hand. Funny how history keeps coming back at you.

So that’s my Bunky story. I’m sure that there are still mountains of silver under Park Avenue. But all that Hunt silver is long since gone by now.

One Saturday morning at 4 am back then I get a call.

Are you BK?  
Yes.

Do you work for Citybank?  
Yes.

Are you the guy responsible for the bullion vault?  
Yes.

There has been an accident. The Number 6 southbound local train has derailed at 53 and Lex. The lead train crashed into the wall. The crash has set off every alarm in your vault. The noise is deafening. What should we do?  
Call the police!  

This is the police!

It took hours for me to figure out how to turn off an alarm system on a Sunday morning. The cops were pissed. Just old stuff...