In Jim Cook's Archive


By James R. Cook

A commodities analyst for one of the major financial firms recently reported that the price for silver would stay flat this year. One of the major reasons was a big increase in people selling off their silverware, coins and other silver items to be sent to the refinery and melted down. I’ve been in business during one of those hectic periods when people sold their silverware. Nothing like that is going on now. Hardly anyone is selling their silver in any form.

It’s easy to be suspicious of such a report. Especially when the company putting out the analysis is likely short quite a few tons of silver. The price would have to be a lot higher than it is today before people sell their silverware and any other prized silver items. Furthermore, an awful lot of silver has already been melted.

In 1979 silver and gold were sizzling. The price was going up and the volume of transactions multiplied from one month to the next. In the fall of that year I got a call from Fred, one of my suppliers. “This thing looks like it’s going to get a lot bigger,” he told me. “I’d like to merge with you and run your trading department.” I thought about it for a few days. It wasn’t going to cost anything, and he was satisfied with a salary and small percentage, so I said okay. He came aboard. Meanwhile, the price of metals kept climbing.

When silver hit $35 an ounce we started to see people unload small amounts of silver coins, jewelry and silverware. We began to buy it from local coin dealers. We then sold it to refineries. Suddenly the price of silver broke through $40 an ounce and the flow of silver scrap turned into a torrent. Almost immediately, the refineries fell behind. Soon they advised of refining delays up to six months. That put everyone who was buying silver into a pickle. If you sent $500,000 of silver to the refinery, they weren’t going to send you any money for six months. Soon everybody who was buying silver had their capital tied up at the refinery. A lesser problem was that the price could drop precipitously in six months and you could lose money.

Fred knew a banker at the major bank in town. We told them our story, but they hesitated. The flow of silver soon turned into a river. We would shortly be out of money and could buy no more silver to melt. I scrambled around to other major banks. They listened, but no one would say yes. Fred’s bank remained interested, but we couldn’t get them to pull the trigger. Silver jumped again, and on one especially hectic day Fred bought more silver than we could pay for. I was worried and frustrated. We rushed down to the bank and told them we had to have money or we were out of the silver scrap business. They relented and gave us the green light.

Up to that point in my life I’d probably borrowed $25,000 at the most. The bank gave us a $28 million credit line. It was perfectly safe. We sent the silver to Handy and Harmon. They gave us a receipt and put it in line to be melted. We gave the receipts to the bank and they gave us the money. When the silver was melted, the refiner paid us and we paid the bank. To protect us from a price drop, we sold an equivalent amount of silver ounces short in the futures market. If the price dropped on what we had at the refinery, we would gain an equal amount on the short sale.

Suddenly, we had money and smaller dealers didn’t. Our phones rang off the hook. A long line of coin dealers, jewelers and others lined up in the lobby of our building each day, bringing us hordes of silver. We had two employees in the vault whose sole job was to smash silver trophies, cups and tea sets until they were flat and could more easily be shipped. Large buckets of silverware, coins, Franklin Mint ingots, gold teeth, rings, chains and jewelry were piled to the ceiling. In short order, we bought and shipped half a billion dollars worth of metal. It was incredibly lucrative. In a little over six months we made $12 million. At times, we had as much as $20 million financed at 23% interest. We didn’t melt all the silver. The best tableware we held out to sell at a premium. The bags of coins we sold to New York, and the good jewelry we sold at a premium to jewelry dealers. The refinery cut the turn around time down to six weeks, so we didn’t ever reach the limit of our credit line.

Silver fell in the latter part of 1980, and into 1981. One day I got a call from the bank. They wanted to meet with me in the morning. When I got there I was escorted into a room. The banker introduced me to a pair of young lawyers sitting there. Then she told me they were calling our loan. I was dumbfounded. My stomach was in such a panic I couldn’t talk. She explained they were coming to our office that day to count our inventory. At the time the loan was six million. I returned to my office in a daze. I called Fred in and told him the news. He didn’t seem to be surprised.

The next day Fred met with me to propose a plan. He would lift our hedges and liquidate the inventory to pay back the bank loan. He would also leave the company and start his own gold scrap and silver buying business. He would pay for some of our inventory and take it with him. About twenty employees would go to his new company. A light went on. Was the bank going to finance him, I wanted to know. He was evasive. My choices were limited. Without a credit line I would have to let the scrap business go with Fred. However, that division of the company was doing a much smaller volume, and the profits were far less. I would be rid of a big chunk of overhead and that was okay. I reluctantly agreed to Fred’s proposal.

We sold the inventory and paid back the bank. Fred started up his new company. The bank financed him from the beginning. I felt he had pulled the rug out from under me with the bank, and they had stabbed me in the back to help him. Two years later my company was selling a lot of St. Gaudens, Double Eagle gold coins. I heard Fred was buying thousands of them and trying to corner the market. We stopped selling St. Gaudens, and their price fell.

A month later Fred called me. He was going out of business. “I owe the bank seven million,” he told me. “The Saints are worth $5 million. The bank doesn’t know what they’re worth.” He proposed that my company buy the Saints for three million, which he would give to the bank. Then my company would sell the Saints for five million and split the two million difference with him. Fred had been totally upright in our dealing so I was surprised by his proposal.

It must have been because Fred once owned a coin shop. If a grandma came in to sell a silver dollar worth $50, he would give her $5 for the coin. That was the ethic of most coin shops. If you could get it for much less than it was worth, that was considered a shrewd buy. Fred was applying the same logic to a much larger deal with the bank. I called him the next day and told him I wasn’t interested, because it looked like fraud to me, and that he shouldn’t do it. I heard later he sold them elsewhere. I didn’t have much sympathy for the bank.

The silver episode of 1980 never repeated. No great influx of household silver ever came to the market again. Many people like Fred made the mistake of expecting to see it quickly resume. Instead, they went out of business. A lot of silver was melted. It’s doubtful that the great quantities available back then exist today. Certainly, the plentitude of silver coins in dresser drawers have migrated into stronger hands, or have been melted. Talk of the public selling large quantities of silver these days is faulty analysis.

Will people ever line up to sell their silverware again? Perhaps. The facts, as presented by Ted Butler, are overwhelmingly bullish. Silver could go much higher in price. It’s probably going to

crack $50 before much selling begins, and then there may not be that much to sell. I’d like to experience such an opportunity again. However, if it happens, it will be at dramatically higher price. So, there’s no point in worrying about it now.

There’s nothing more exciting than a silver market gone ballistic. There’s a good chance we’ll see these fireworks ahead. The higher silver goes, the more desperate will be those who must have silver to make their products or to cover short sales. That makes silver the perfect asset to buy and hold for some exciting twists and turns ahead.

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