In Jim Cook's Archive


In late 1978 and throughout 1979, gold and silver saw a dramatic price rise in conjunction with high levels of inflation. In 1979, silver rose from $6.10 an ounce to $49 an ounce. 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 who melted it. 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 us of refining delays of up to six months. That put everyone who was buying silver into a predicament. 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. Another problem was that the price could drop precipitously in six months, and you could lose money.

The flow of silver soon turned into a river. We would shortly be out of money and could buy no more silver to melt. We had been talking with a major bank about financing us. They listened, but hesitated saying yes. Silver jumped again, and on one especially hectic day we accidentally 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 & Harman. 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 the 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 an avalanche of silver. We had two employees in the vault whose sole job was to smash silver trophies, cups and tea sets with a rubber hammer until they were flat and could more easily be shipped. Large buckets of silverware, coins, Franklin Mint ingots, gold teeth, rings, gold chains and jewelry were literally 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 commodity dealers, and the best jewelry we sold at a premium to jewelry dealers. Eventually the refinery cut the turnaround 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. Our 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.

The next day my chief trader met with me to propose a plan. We would lift our hedges and liquidate the inventory to pay back the bank loan. He would then 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 him. However, that division of the company was doing a much smaller volume, and the margins were shrinking dramatically. I would be rid of a big chunk of overhead and that was okay. I agreed to his proposal.

We sold the inventory and paid back the bank. My ex-trader started up his new company. The bank financed him from the beginning. I learned 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. Gauden’s Double Eagle gold coins. I heard my ex-trader was buying thousands of them and trying to corner the market. We stopped selling St. Gauden’s, and their price fell.

One day, my ex-trader called me. He said 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 Saint Gauden’s 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.

It must have been because my ex-trader once owned a coin shop. If a grandma came in to sell a silver dollar worth $100, he would offer her $5 for the coin. That was the ethics of most coin shops. If you could get it for much less than it was worth, that was considered a shrewd buy. He was applying the same logic to a much larger deal with the bank. I told him I wasn’t interested, because it looked like fraud to me. I heard later he sold them elsewhere. I didn’t have much sympathy for the bank.

In early 1980, silver peaked at $50 an ounce. Gold reached $850. Pressure was on to stop the inflation. The chairman of the Federal Reserve, Paul Volcker, was directed to end the worsening inflation. I have little doubt that Mr. Volcker was familiar with the warnings of Ludwig von Mises who had written, “Inflationism is not a variety of economic policy, it is an instrument of destruction; if not stopped very soon, it destroys the market entirely.” Chairman Volcker moved to radically stop the inflation by pushing interest rates to what seemed like astronomical levels. By 1980, interest rates were over 20%. It worked because by 1983, the inflation rate was back down to 3.21% and Mr. Volcker was a hero.

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

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