Whatever happened to auntie's tea set?

You climbed up into the attic, found Aunt Nellie's tea set, polished it up, and sold it for an astronomical sum. You're happy -- very happy -- and you have some very rich men in Chicago to thank.

Those rich men might never set eyes on the tea set. What they're smiling about is the killing they've made speculating in silver, speculation which had the by-product of making Aunt Nellie's tea set a treasure chest.

The behind-the-scenes story of silver is one of rip-snortin', no-holds-barred , free-wheeling capitalism. It is a tale that harks back to the likes of Jay Gould -- a turn of the century industrialist/financier -- who used to buy huge quantities of a stock at low prices, play up the stock in the headlines of the newspaper he owned, and then sell when the stock gained enough points, leaving other shareholders to bear the resulting drop in prices.

Mr. Gould would end up in jail these days. But the extraordinarily wealthy men who helped push silver from a price of $3.27 per ounce in 1974 to a high of about $58 several weeks ago certainly did nothing illegal. Just the opposite, they took full advantage of the system, devising their plan with the precision of a diamond cutter and unleashing it with the impact of a diesel locomotive at full bore.

Most of the action took place on the Chicago Board of Trade (CBT) and the New York Commodities Exchange (Comex), where contracts for ounces of raw silver are traded. The scenario involved a few, wealthy individuals who bought just about every contract for silver they could between June, 1979, and January, 1980. The names of these persons is officially unknown. They have not exactly stood up to be counted, and all trades at CBT and Comex are, by law, confidential.

However, James Sibbet, author of the Silver and Gold Report newsletter and considered the authority on the metals, says the main players are the progeny of the late Texas oil billionaire H. L. Hunt -- brothers Nelson, Lamar, and Herbert -- and some Arabs, almost definitely members of the Saudi family. Nearly everyone agrees with his roster, though rumors variously include an Indian, a Pakistani, a Kuwaiti, Far Eastern "interests," and some Belgians in the group.

The end result of their actions is that the price of silver has rocketed. Various companies have blanketed the country with full page newspaper ads, offering to pay 200 percent over the face value of US coins minted before 1965, the date when the government started putting copper in silver coins. Hours-long lines form at the doors of such companies. People bring in bags of silver coins they have hoarded and their wedding silver, hoping to cash in. In a typical example, one Southern California man showed up at a coin shop with $50 worth of half dollars and walked out with $1,200 worth of greenbacks.

To understand what happened to silver, one needs to know how commodity futures markets work. Commodities are items such as silver, gold, grain, cocoa, sugar, cotton, etc., etc.. Commodity futures are agreements called contracts between buyer and seller to exchange a certain amount of a particular commodity at a specific price and date. Commodity futures are bought and sold both to actually acquire the commodities and for speculation. Selling a contract is called holding a "short" position. Buying a contract is called holding a "long" position. Most of the people who trade on the exchanges are speculating. They have no intention of owning bushels of grain or ingots of silver.

Someone who has bought a commodity contract who does not want the actual silver will try to sell that contract to someone who doesm want the silver before the delivery date. If the price of silver is higher when he sells the contract than when he bought it, he has made money.

But you don't need to own any of a commodity in order to sell a commodity contract. Someone can tell his broker to sell a contract for silver, even though he owns none of the glittery stuff. An investor who does this hopes to buy the contract back before the delivery date at a lower price, and make money that way. Naturally, the person who bought the contract from him hopes for the opposite.

The futures markets are one great game of pretend. "Except for one legal technicality, it's a gambling house," says Mr. Sibbet. "By far the majority of people who buy contracts never take delivery," says CBT's John Geldmacher.Those are the unwritten rules and everybody who plays the game understands and follows them.

But those few wealthy individuals, whoever they are, went into the silver futures market to play for keeps. Beginning in 1979, they allegedly bought just about every silver contract (for December delivery) they could, and they kept buying. The price went up and up, from about $8 an ounce to about $58 an ounce, and they (or whoever was doing the buying) kept buying and buying. Under normal conditions, these mysterious buyers would have sold their contracts before the December delivery date, and such a large number of contracts coming on the market all at once would immediately deflate the price.

Then a strange thing happened on the way to the silver mines. These buyers did not sell. They broke the pretend rules and took delivery of the silver. Then they took delivery of the January silver contracts they bought, then the February contracts. They had cornered the market.

"Some people -- the CBT has no official position on their identity -- amassed huge quantities of both silver and silver contracts, and they kept on amassing them," said Mr. Geldmacher. "When something like that happens, it jams the price way up and prevents the people who really need the silver from buying the quantities they need."

It's called a squeeze and it works like this: If, back in October, a particular investor decided to hold a "short" position (sell a contract) for silver he did not really own, he would be most anxious to buy that contract back before the December delivery date -- before he had to actually come up with the silver. If the Hunts, or Mr. X, bought our man's contract back in October, they would normally be more than willing to sell it back to him, particularly since they had driven the prices up many fold and stood to make a killing while our man who was "short" would lose lots of money, since he would have to buy the contract back at a much higher price than he sold it for.

However, if Mr. X decides not to sell the contract back to our investor, the latter must deliver the silver. "If he does not have the silver to deliver," says David Johnston, executive vice president of E. F. Hutton and a member of the board for Comex, "he is in default, and whoever holds the contract can dictate the terms and the price of a settlement."

"The people in short positions just got clobbered," says Dean T. Jenks, senior partner with Jenks, Kennifer, and Richardson of Newport Beach, California. "The price kept going up and they could not get out of the market. People lost hundreds of thousands of dollars." He has little sympathy for them, though, since "when you play the futures market there is always the risk that you will lose it all."

Further down the line, however, Kodak raised its film price 75 percent, and a four-piece place setting of sterling silver suddenly needed an armed guard. This is because silver, unlike gold, has value beyond its preciousness. Gold is basically worthless. People who like it have just decided they will pay lots of cash to own it.

Silver, on the other hand, is irreplaceable in certain industrial processes, notably filmmaking and electronics. Kodak absolutely must have silver and therefore has no choice but to pay whatever the market, and the Hunts, demand. GAF, Inc., another photographic film manufacturer, decided in 1979 to hedge on its silver supply by selling contracts on the futures market -- with the intention of buying them back at a lower price. The jump in prices cost the company $3.9 million. The Hunt brothers, the Saudis, and whoever else was in on the squeeze have done for silver what OPEC did for oil.

Some of the silver that people have been trading in has ended up on spot markets, where industry has snatched it up. Aunt Nellie's tea set might make your next home movie possible.

The Wall Street Journal has estimated that at the height of the squeeze, the Hunts owned somewhere between $4 billion and $6 billion worth of silver and contracts for silver at $50 an ounce. That works out to between 80 and 120 million ounces of silver. According to June Burdick, a Chicago Board of Trade economist, there are probably no more than 126 million ounces of silver in the combined warehouses of CBT and Comex. The total amount of raw silver -- i.e., that which is not already being used in coins, etc., -- available for delivery in the US, is certainly not more than 200 million ounces, according to various estimates.

Worldwide, annual silver consumption by industry alone far exceeds annual production from silver mines, a fact which presented an open invitation to manipulate the silver market. In 1979, of the 433 million ounces of silver put to various uses, industry accounted for 410 million ounces, says Walter L. Frankland Jr., executive vice president of Silver Users Association in Washington, D.C. Only 271 million ounces, though, actually came out of the ground. Existing and dwindling stock chipped in the rest.Of the 165 million ounces used in the US last year, he says, the photo industry gobbled up 65 million ounces, and electronics companies claimed 42 million ounces. A simple 10 cent per ounce increase in silver prices cost the photo industry millions of dollars, says Mr. Frankland. The activities of the Hunt brothers and others have sent Kodak scientists scurrying to find alternatives to the metal. No luck so far, although photo companies have found much more efficient methods to recycle their silver.

What these supposedly unidentified buyers of silver plan to do with their hoards is anybody's guess. "They may just feed it back into the market gradually and be satisfied with their unbelievably huge profit," comments one CBT official. "But you just never know about the Hunts. They seem to have this doomsday psychology that silver is the best way to protect their wealth after the holocaust they seem to think is around the corner."

Whatever their future plans, the python-like grip that the Hunts and Saudis had on the silver market prompted the CBT to try to break it. In January, the CBT slapped down a regulation that limited the number of silver contracts any one person could hold to 600 (each contract is for 5,000 ounces of silver). They followed with a requirement that all traders with February silver contracts had to liquidate (sell) them by the end of February. They could not "roll over" the contracts to the next month, as the Hunts had been doing.

The flood of contracts being sold sent the price of silver back down and broke the squeeze, at least temporarily, but also sent up howls of protest from the Hunts as well as smaller traders, who had taken advantage of the price jump.

Mr. Sibbet, author of The Silver and Gold Report, has sued CBT, calling the action unconstitutional. "It's like playing cards and having the house change rules of the game, in favor of the house, once the game has already started." The suit is still pending. There is also talk of a Federal Trade Commission investigation into the possibility of misleading advertising by the CBT.

E. F. Hutton's Mr. Johnston sympathizes with Mr. Sibbet but still supports the liquidation and position limit orders. "I'm a free market man myself," he says, "but you have to look at the alternatives. There was the threat that the government might close down the market."

Government agents agree. "We have been monitoring the silver market all along," says Bruce Stoner of the Commodity Futures Trading Commission (CFTC), an independent federal agency set up to regulate and oversee the exchanges, "and there was considerable cause for concern over the possibility of a squeeze preventing the people who really needed the silver from getting it. No specific action was taken by the commission because it was felt that the action by the exchanges was well-timed and all that was needed."

"When you have a few people manipulating the market, then it is no longer a true market. It does not accurately reflect and cannot respond to true supply and demand," Mr. Johnston says. "A very few people, in essence, bought a year's supply of silver. They completely dominated the market so that it responded primarily to them."

Regulations like the ones imposed by the CBT already exist on most other vital commodities markets, to avoid manipulation like what has just happened on the silver market. Somehow, no one noticed that silver was undervalued in relation to its use in industry, and that its market was largely unregulated. No one noticed, that is, until now.

In the view of Mr. Sibbet and others who support his court action, the futures market represents the last vestige of pure capitalism left in America. It is an arena where economic movement responds primarily to its own financing ability -- supply supply, demand, investment, capital, even the whims of rumor, politics, and nature -- with little external and artificial control. An investor can enter this arena, knowing that there are few rules, and win or lose money -- even fortunes -- depending on the combinations of hunch and savvy brought to bear.

Whatever the outcome, the controversy has shaken up some members of the commodity exchange. "The rule of thumb has always been that no one is bigger than the market," says CBT's John Glenmacher, but the Hunts -- or whoever -- made short work of that dictum. They had more money than the market had silver, and the same thing could happen to other commodities.