As I walked into the old Commodities Exchange Centre, located on the fifth floor of the old World Trade Centre, on an early morning in late summer 1989, little did I know my life would change forever. All I was thinking about was my new $22,000-a-year job and having money to buy food.
A few months earlier, my good friend and college 'fraternity brother' Tim helped me land a job with his twin brother, David, on the Cotton Exchange. Tim's other brother, Thomas, was also a member of the New York Cotton Exchange, and started working on the floor right out of high school. He began his career on the COMEX, where gold and silver were traded.
Back then, the COMEX was the most expensive seat on the trading floor, and also the most prestigious. Back in the day, the trading badges were green, cotton was orange and the rarely seen gold-coloured badge meant you could trade on any market on the floor, from coffee to cotton and from crude oil to orange juice. The NYMEX was still fairly new and not as coveted, and NYMEX badges were yellow.
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Anyway, I made my way up to the fifth floor of the World Trade Centre. I was dressed in a suit and tie, and it was pretty much the first and last time, at least on the trading floor.
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As I got my temporary security badge, I peered out onto the vast trading floor. It was completely dark and silent. But it wouldn't remain that way for long. I had arrived around 6am, before the exchange came to life. So I walked around the floor in relative darkness, looking at the glowing old terminals, watching the old clackboards on the walls as some of them changed with the night markets. And the distinctive sound of all of the time stamps on the floor snapping at once with a big 'thwump' at the half-hour mark. The floor was carpeted and without a scrap of paper on it - not so much as a paperclip. The ceilings soared three stories in the air, and the trading pits were raised above the floor.
I knew the minute I walked around the old exchange I was home.
One of my favourite stories from the old-timers on the floor was the story of the Hunt Brothers' Silver Market Debacle. I will share with you the history of these events as told to me back then by COMEX (the former Gold Exchange) members, traders and old-timers in my first weeks of working on the floor.
In the late 1970s, two Texas oil barons with no shortage of money or guts moved to corner the world's silver market. William Herbert Hunt and Nelson Bunker Hunt had been accumulating silver for years, and the only way they could make their scheme work was to partner with some wealthy Arabs.
At first, their timing seemed brilliant. The Hunt Brothers had hit a gusher, so to speak, when the price jumped in 1973 from $1.95 per oz to $5 in 1979. During that critical six-year period, the Hunt Brothers had amassed the equivalent of approximately half the world's deliverable cache. They also managed to help drive the price even further to above $54 per oz.
By March 1980, just when the Hunt Brothers were sitting pretty, the Federal Reserve pulled the rug out from under them by changing important COMEX trading rules. Suddenly, silver plunged 50% on March 27, 1980 - a day that will live forever in the hearts of us traders.
The high-flying Hunt Brothers had crashed big time. They became one of the biggest bankruptcies in US history. And as if ending up the poor house wasn't sufficient punishment, they went further down the road to the big house, too - after their conviction of conspiring to manipulate the market.
While it certainly was the end of the Hunt Boys, that wasn't necessarily the end of silver.
After the Hunt debacle, silver fell into a deep sleep - falling to about $3.50 in the 1990s. It took a long snooze in that price range, with the exception of a brief spike to the $7.50 range in 1998 when Warren Buffet started accumulating it. During those years, probably the only thing more boring than trading silver was watching water boil.
Then something curious started to happen...
After bottoming out in November 2001 at $4.06, silver woke up - soaring 63% to the $6.60 range. The rise was particularly interesting when compared to gold, which itself has risen 80% from the depths of February 2001.
The difference was that gold is a world currency, and silver is not. Gold's price is influenced by currency markets, while silver's is driven strictly by supply and demand.
As a result, there are three primary markets for silver:
* The ornamental market serves jewellery and silverware;
* An investor segment concerns silver bars and coins;
* And the industrial part includes photographic film and paper, computer components, brazing alloys, pharmaceuticals and alternative energy applications.
What works in your favour is that few people know that the industrial sector is the biggest for silver, while the investor segment is the smallest.
The biggest dilemma - and opportunity - for speculators is that silver is getting to be very hard to find. The fact of the matter is US government supplies are long gone and they now need to purchase silver just to meet demand for coin and bars. Central banks sold out most of their supply of silver as prices languished.
Some ultra-wealthy investors such as Warren Buffett, George Soros (through Apex Silver) and Bill Gates (through Pan American Silver) have taken on significant silver positions. I hardly think that any of these well-known investors might be the next Hunt brothers, but more likely these masters of wealth see a profitable trade in having major positions in silver where others don't.
The moral of the story? Silver has been undervalued for far too long and now seems to be having a rebirth for smart investors who only know the story of the Hunt brothers as something that happened a long time ago.
The happy ending may be for those investors who are buying silver at these levels; they just may end up living happily ever after, after all.
By Kevin Kerr for The Daily Reckoning
With 15 years of experience, Kevin Kerr is a true veteran of the commodities markets. A licensed commodities trader since 1989, he's worked the trading pits in Chicago, New York and London with legends like Paul Tudor Jones. Over Kevin Kerr's career he's dealt with everything from cotton to currencies to oil, natural gas, and commodities derivatives.With 15 years of experience, Kevin Kerr is a true veteran of the commodities markets. A licensed commodities trader since 1989, he's worked the trading pits in Chicago, New York and London with legends like Paul Tudor Jones. Over Kevin Kerr's career he's dealt with everything from cotton to currencies to oil, natural gas, and commodities derivatives.
