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June4,1 982

N ot -So-PreciousMetal
The recent cycle of inflationary boom and
disinflationary recession has been accompanied (as always) by a massive boom-andbust cycle in world commodity markets. The
silver market in particular has witnessed
severe price swings in this period. These
movements have reflected, first, a major
cyclical expansion in the world economy,
aggravated by the attempt of some traders to
dominate the silver market in late 1979 and
early 1 980-and then the economic recession and speculative liquidation of stocks
during the past two years. By early this week,
therefore, the New York producer price had
dropped to $6.02 per troy ounce-back to
the 1979 low and far below the peak of
$48.00 reached in January 1980.
Congress decreed a $1.29-per-ounce
monetary value of silver in 1792, and
maintained that value until the mid-1960s,
when market forces and burgeoning inflation
forced the demonetization of the noble wh ite
metal. But silver's market price generally
lagged far below the monetary value
throughout most of the nation's history. After
World War II, the market value of $0.90 per
ounce was kept there only by a massive
Treasury-purchase program, which led to the
accumulation of 3.2 billion ounces of metal
over a quarter-century.
But with the Vietnam inflation, the market
price almost tripled to $2.56 in 1 968-and
then reached $6.70 at the 1974 speculative
peale This price upsurge reflected a
worldwide industrial boom and heavy
speculative demand associated with a series
of international financial crises. But in
addition, it reflected the widening gap
between worldwide consumption and
current production, as well as the increasing
need to rely on Treasury and other stockpiles.
The white metal's impressive physical
characteristics contributed to a substantial
increase in consumption until recent years. It
is foremost in electrical and thermal

conductivity, highest in optical reflectivity,
and second only to gold in ductility. By the
early 1970's, therefore, silver had gained new
luster am'ong dentists as well as debutantes,
and among spacemen as well as shutterbugs.
Although consumption then began to
weaken in response to rising prices,
speculative forces took over in the late 1970's
to drive prices to unprecedented heights.
No longer money
The nation's silver problems can be traced
back several decades, to the time when a
substantial gap first developed between
(and world) consumption and current
production. (The U.s. generally accounts for
more than one-third of the non-Communist
world's total demand.) The U.S. metthe challenge in the early 1960s by exhausting almost
all of the Treasury's stockpile, most of which
disappeared in a futile effort to retain silver's
monetary role. Eventually, Congress passed
legislation to withdraw all silver-backed
currency from circulation (1963), and then to
replace silver-with other metals in the
nation's coinage (1965). But by that time,
practically all of the Treasury's original
3.2-billion-ounce stockpile had gone.

u.s.

Industrial consumption of silver reached
all-time highs in the 1973 boom, but then
began to decline as a reflection of the rising
price trend. U.s. consumption in 1981 just
about equalled the 1971 figure, but fell
one-third below the 1973 pealdigure-see
chart. Total world production meanwhile
increased 11 percent between 1971 and
1 981 -but production in 1981, at 264
million ounces, fell far below world industrial
usage of 363 million ounces. To fill this
contiQuing gap meant drawing down, year
after year, the stockpiles built up over the
centuries for coinage, investment and
speculative purposes.
Speculative bubble
Amidst the inflationary flight into goods
which characterized the late 1970s, silver's

JThilli JkCD)
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Opinions expressed in this newsletter do not
necessarily reflect the views of the rnanagement
of the FpdE'ral Reserw" Bank of San Francisco,
or of the Board of Covernors of the Federal
Reserve System.

Stronger prices?

unique supply-demand situation led many
speculators to invest even more heavily in
that specific commodity. Most of the
headlines at the time were garnered by the
activities of two investment groups-one
centered around the Hunt family of Dallas,
and another centered around several foreign
traders acting through the Conti-Commodity
commission houses. Their activities
contributed significantly to a 675-percent rise
in silver prices between January 1 979 and
January 1980, and tnen to a subsequent
collapse. According to the Commodity
Futures Trading Commission, in December
1979 the two groups owned outright (or
controlled through futures contracts) more
than 250 million ounces of silver. In the
words of the House Government Operations
Committee, "Although a number of political
and economic factors contributed to silver
price movements during 1 979-80, the
primary cause of the abrupt rise in price
and the resulting disorderly markets, both
cash and futures, was the millions of ounces
of physical silver taken off the markets by
the major speculators, the Hunt and Conti
groups."

With the spread of a worldwide recession, the
si Iver market has now seen prices drop even
further, to only about half of the lowpoint
reached during the March 1 980 market
collapse. In the process, the ratio of gold to
si Iver prices has risen to about 50-1 ,
compared to a 32-1 ratio prevailing
throughout most of the 1970s and a 5-1 ratio
that the Hunt brothers reportedly considered
reasonable. Still, amid all of the bearish
factors now dominating the market, several
influences-in
addition to the usual cyclical
upturn in business activity-could
help boost
si Iver prices.
Prices could rise again if inflation resurfaces,
especially in view of silver's traditional role as
an inflation hedge. Inflation and monetary
uncertainties have historically generated
interest in silver, and this will continue to be
true. Indeed, speculative factors generally
have dominated price movements during
periods of rapid inflation.

Weaker prices?
Most other factors, however, point in the
direction of further price weakness. The
declining trend in U.S. industrial consumption is a crucial factor in this regard. Between
1 978 and 1981 , for example, use of silver in
materials declined 22 percent,
and use in sterling and electroplated ware
dropped 51 percent, reflecting the attractiveness of silver substitutes and increased
recycling of materials, plus technological
breakthroughs occurring in photography and
other fields.

The bubble burst in January 1 980, and the
price slide accelerated in March when buyers
of futures contracts on the commodity
exchanges had trouble meeting margin calls.
In the process, silver dropped in price to
$11 .1 0 from the January peak of $48.00 an
ounce. (The silver debacle reflected, in
exaggerated form, the price decline then
occurring in all commodity markets.) The
Hunt brothers' role ended when their Placid
Oil Co. obtained a $1 .1 -billion loan
(renegotiated this March) from a consortium
of 20 foreign and U.S. banks, on the
understanding that they would expeditiously
dispose of their 60-million-ounce silver
holdings and refrain from future commodity
speculation. On the regulatory side, the
episode ended with new government and
commodity-exchange controls on trading in
contracts for silver futures.

A potential increase in supplies is also a
possibility. According to the Handy and
Harman processing firm, some 500 million
ounces have come out of India in the past 15
years, and more seems to be availablealthough of course the stock is not
inexhaustible. This flow appears to react
quickly to price changes, although the
liquidation rate has held up even at the

2

relatively low prices of the past two years.
In addition! some supplies could become
available from the U.S. strategic stockpile of
138 million ounces. Actually, the General
Services Administration held several sales of
stockpile silver last fall, but suspended sales
after opposition arose from domestic and
foreign producers. But that stockpiled metal
still could be sold at some later time, thereby
depressing market prices.

future probably will be dominated by the
actions of speculators and investors, as has
been the case for the past several years. In the
absence of another inflationary upsurge, with
another massive flight into goods, the large
silver stocks now overhanging the markets
could keep prices near current levels for
some time to come.
William Burke
-High

Even greater supplies potentially overhang
the market, however, in the form of the 350
million ounces held by investors and
speculators throughoutthe world (Handy and
Harman estimate). The Hunt brothers'
estimated 60-million-ounce holdings are
only the most obvious portion of that supply.
Future price levels will depend to a
considerable extent on the speed with which
such stocks are liquidated. And an even
larger supply consists of the 90-percentsilver U.S. coins that have practically disappeared from circulation. Large quantities
of these old coins-which total an estimated
655 million ounces-could come into the
market, especially in the light of today's high
interest charges for carrying silver inventories. Indeed, many holders of coins (or
other forms of silver) might be strongly
tempted to dump their supplies on the
market.

Dollars

40
SILVER
PRICE RANGE

30

20

10

I.1.111
1 1
0:[ 1

Million U S INDUSTRIAL USAGE
ounces

Altogether, silver as a commodity could be
expected to rise in price over the long term,
in view of the fundamental gap between
worldwide industrial demand and new mine
production. Indeed, futures-market
developments recently have indicated some
strengthening of prices. But the near-term

2°°1
1970

3

1975

1980

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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)

Selected
Assets Liabilities
and
large Commercial
Banks
Loans (gross,adjusted)and investments*
Loans (gross,adjusted)- total #
Commercial and industrial
Real estate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Other securities*
Demand deposits - total#
Demand deposits - adjusted
Savingsdeposits - total
Time deposits - total#
Individuals, part. & corp.
(Largenegotiable CD's)

WeeklyAverages
.
of Daily Figures
MemberBankReserve
Position
ExcessReserves + )/Deficiency (- )
(
Borrowings
Net free reserves + )/Net borrowed(- )
(

Amount
Outstanding
5/19/82
159,405
138,591
43,598
57,159
23,335
1,791
6,042
14,772
37,784
26,232
30,611
93,133
83,448
34,002
Weekended
5/19/82
46
20
25

Changefrom
year ago
Dollar
Percent

Change
from
5/12/82

-

-

-

-

10,834
12,042
6,295
4,858
413
284
360
827
2,097
1,226
434
13,011
13,086
2,420

51
126
297
7
6
257
7
68
601
365
39
118
153
122

Weekended
5/12/82
104
20
84

I-

II-

I-

7.3
9.5
16.9
9.3
1.8
18.8
5.6
5.3
5.3
4.5
1.4
16.2
18.6
7.7

Comparable
year-agoperiod
2
121
123

* Excludestrading account securities.
# Includes items not shown separately.

Editorial
comments be addressed theeditor(WilliamBurke) to theauthor.... Free
may
to
or
copies this
of
andotherFederal
Reserve
publications beobtained calling writingthePublic
can
by
or
Information
Section,
Federal
Reserve of SanFrancisco, Box7702,SanFrancisco
Bank
P.O.
94120.Phone
(415)544-2184.

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