As you see for 1979, the average price was $11.09 per ounce, slightly more than twice the level for 1978. Through May, the price averaged the high of $48.00 was reached on January 21 when silver traded in Chicago as high as $52.25 on the Chicago Board of Trade. Chart No. 6 gives a summary of both monthly and year-todate averages. THE GOVERNMENT AND SILVER I hope these charts have been able to give a general background on the metal we are discussing today. Before going into recent happenings, I would like to mention where the government has been directly involved with silver. I mentioned earlier that during the period 1967-70 the government was a big seller of surplus silver. In the years prior to 1965, the government has been an extremely big user of silver for coinage. This use in circulating coins came to a halt in 1969. Today the government still has a large stock of silver. The largest amount of 139 million ounces has been declared surplus to defense requirements and with Congressional approval could be made available to the market. The Treasury holds another 39 million ounces in its stock of silver for possible future coinage. There are currently no such plans. THE COMMODITY FUTURES TRADING COMMISSION (CFTC) Another and more highly publicized area of government activity has been in commodity trading where the Commodity Futures Trading Commission has jurisdiction. SUA has supported the work of this body because we became convinced that self-regulation was not working at the exchanges in a manner sufficient to avoid excess speculation and perhaps other unhealthy activities in silver futures trading. When the market began heating up last year, as the representative for the many facets of the industry, SUA attempted to get the exchanges to raise their margin requirements and to consider imposing limits on the number of contracts individuals could hold. In the area of margin requirements, we succeeded in getting token increases but never higher than 5 percent until quite late in the year. We also worked with the Commodity Futures Trading Commission, the federal regulatory body in Washington which governs the commodity futures business in a manner similar to the way that the Securities and Exchange Commission regulates the securities business. RECORD TRADING VOLUME The CFTC, in existence only since 1974, had a real tiger by the tail because the futures trading business has grown at a phenomenal rate. In 1975, the total number of contracts for all commodities traded in the U.S. amounted to 29 million. That number had more than doubled by 1979 after increasing 20 million in that year alone. In dollar value for the full contracts, we are talking, if you can believe this, of more than one trillion dollars last year for all commodities. Regarding silver, the trading figures are unreal. Nearly 35 billion ounces were traded during 1979. At the average silver price of $11 for that year we are speaking of contracts valued at $385 billion. During this same one year period, industries in this country used slightly more than 166 million ounces. I ask you, was there excess speculation? I do not believe the question is debatable. You can easily realize the size of the problem for the CFTC when one considers the volume alone. The attitude of the CFTC during the period when the silver market was heating up from a price standpoint was to rely upon self-regulation on the part of the exchanges rather than to declare an emergency and to impose strict measures of control on speculative limits and margin requirements. It was during the middle of last year that the price was increasing at an historic rate. In 1978, the then record high average price of $5.40 per ounce was set. By May of 1979, the price had reached $9.75 and then it appeared to top out. Most users were hopefully thinking that the laws of supply and demand were finally coming back into action. You see, as the price rose, demand in some areas was beginning to weaken but more importantly, scrap silver was increasing, so the price also began to soften. Then, on August 6, the market turned around once again and with renewed speculation a then high for the year at $18 was established on October 1. To give you an idea what kind of daily trading volume there was on the Commodity Exchange of New York City, listen to this figure. On November 26, more than 132 million ounces were traded. If you can believe that figure, think about the silver users of the country who on that same day were consuming only about 650 thousand ounces. I believe that anyone would reasonably agree that this was excess speculation. One can argue, however, that the futures trading was not causing the higher price, but I can tell you that there are many of us who will be hard to convince that this factor was not the major problem. HISTORIC PRICES After a short retreat to the $16 area, the market began once again to take off with the high of $28 on the last day of 1979. By January 21, the historic high of $48 was reached in NYC. It actually traded as high as $52.25 in Chicago on that day. It was then that the "something" happened which was the beginning of silver panic and near financial disaster on March 26. Before discussing that, however, I would like to say a few words about the plight of those in the silver industry trying to do business in a market where the cost of the basic raw material had increased to as high as eight times what it had been only 12 months earlier. IMPACT ON USERS I am certain you can visualize just the cash flow problems alone. Bankers raised their eyebrows quickly when you asked for three, four and more times the money you asked for last time to produce little or no more units. Those in the manufacture of silverware had the problem of changing the price of their products, trying to keep ahead. Retail customers were completely confused. Other users had similar problems. However, since silver represents 90 percent of the manufacturer's costs, the silverware industry was the sector which suffered first and the most. Now, back to what happened on January 21 which eventually led to what happened on March 26. Because of the serious nature of the problem, the Commodity Exchange in New York (COMEX) did not open until the afternoon and then for only one hour. Prior to opening, the announcement was made that there would be imposed immediately strict limits on speculative holdings and increased margin requirement to about 25 percent of the value of the contracts. These restrictions were retroactive and caused immediate scrambling for more cash and even a flight from the futures positions. The imposition of these restrictions, considered reasonable by those in the using industry, was a major factor in at least temporarily limiting speculation in a basic raw material. There were other factors, however. Supplies were increasing as a result of all the publicity silver was receiving. People were lining up to get rid of their unused silver, coins, trophies and the like. Refineries were working on a backlog approaching eight or nine months. Supply from this source could be as high as 40-60 million ounces above what it was last year. On the demand side, the industrial base under the market was slowly disintegrating, because the high price was taking its toll. So, those who were trying to keep the price up and or rising, were facing a much larger offtake to buy. With market restrictions, they no longer had the leverage they once had in the futures market. Finally, high interest rates caused financing problems for the investors and at the same time money market certificates bearing 13 percent and higher returns offered reasonable alternative investment opportunities. When all of the above factors came together, the results were inevitable. The price began to react. For a time, it appeared that perhaps the big money people would be bigger than the market; however, by March 26, it became clear that this was not the case. After suffering a total price drop of $32 per ounce from the high, anyone with 100 million ounces by March 13 had suffered a paper loss of $3.2 billion. Even for some of the richest people in the world, this level of margin call was, at least for the moment, just too much. Most of this has been covered by the media. How the failure of the investor to meet a single 100 million dollar margin call put the company handling the account in a different position. When this same investor or other investors refused to come up with margins with other companies, the problem spread. Huge debts were accumulated. Fortunately for those companies and the financial market in general, the silver market leveled out in the range of $11-15, permitting time to reassess the situation. It is too early to know what the immediate future will bring. There are those who believe that the silver market might test the lows of last year, or $6. From a technical trading view, that is not out of the question. To put it mildly, the silver market is confused. There are huge quantities of scrap silver yet to be refined and an unknown amount of silver connected with the much publicized billion dollar loan to cover silver losses. Price lists are in a shambles and customers are in some cases waiting to see. At prices of $11 or higher, the market for sterling is expected to remain soft for some period. Then, too, there are the pressures of a recession. The market simply needs more time to adjust. Government agencies and the exchanges will continue to see a lot of each other. Determinations as to what the "something" was that happened on March 26 and what should be done to prevent a repeat will be uppermost in many minds. Hearings before Congress may result in new legislation. The Silver Users Association has advocated imposing limits on speculative holdings as well as granting to CFTC the power to set margin requirements. No doubt other refinements of current regulations will be advanced by the Congress and regulatory bodies. All, we hope, would be directed toward encouraging more tolerable market conditions. It seems appropriate to develop public policies to help avoid the deleterious fallout from speculative binges. Legitimate businesses deserve no less. |