The document discusses the silver market and differing views on supply and demand dynamics. It provides context on Warren Buffett's large silver holdings and compares his actions to the Hunt brothers' attempted cornering of the silver market in the late 1970s. While Buffett sees a legitimate supply shortage, others believe substantial hidden supplies could enter the market if silver prices rise significantly again. The document examines factors like regulation, disclosure requirements, global demand, and how market behavior has changed since the 1970s. It also demonstrates a head-and-shoulders chart pattern that formed in the late 1990s silver market.

1. I
f you ask martin armstrong,
the silver market is lined with
lead. A silver trader on the New
York Mercantile Exchange
(Nymex) for almost 30 years and
chairman of Princeton Economics
International, Armstrong sees a mar-
ket with massive stockpiles, rising
output, and falling demand.
Silver futures hovered just above
$5 an ounce in mid-August 1998 after
tumbling 30 percent beginning in
early February. And Armstrong be-
lieves they’re poised to dive further.
“You’ll see $3 silver before you see
$10 silver,” he says. “If there were a
legitimate shortage of silver, it would
be back at $10.”
Armstrong’s dour view is based on
skepticism about the market’s trans-
parency. Whereas the silver mining
industry maintains that the supply of
the metal has fallen short of demand
for the past three years—causing
stockpiles in registered Commodity
Exchange (Comex) inventories to
fall 53 percent in the past year
alone—silver’s headed for a nosedive
to $3.25 in part because so much sup-
ply is hidden in private vaults and in-
vestors can be duped into thinking
there’s a shortage when there’s not,
Armstrong says. “My sources say
there’s so much silver in London,
there’s a shortage of space,” he says.
“Dealers tell me they can’t get storage
space.”
Along with existing supplies of
silver, new quantities also could
dampen the market. Companies are
rushing to open mines because the
metal is again profitable, especially
when currency differences are fig-
ured in, says John Lutley, consultant
to the Silver Institute, a producer-
funded trade group. Lutley says silver
prices have recovered from lows in
the mid-1980s and early 1990s. In
consequence, Mexico in particular
has been increasing production be-
cause the peso is weak against the
U.S. dollar, making silver mining
more profitable. “Production could
rise,” says Lutley, although, he adds,
“you’d still have a [supply] deficit.”
The major debate in the silver mar-
ket thus comes down to how many
ounces either are in vaults around
the world today or could find their
way to those vaults in the near future.
And because so much of that silver
isn’t reported, traders can’t always
tell when silver is scarce. Like others,
Leonard Kaplan, chief bullion dealer
and division manager of LFG Bullion
Services in Chicago, says, “Comex
stockpiles are representative in a
long-term approach” to evaluating
supplies of the metal. Still others in
that market express doubts about the
near term. “Stocks are appearing
from somewhere,” says Adrian Lis-
more, vice president of metals and
mining at Bankers Trust Co. “When
Whether Hunted or
Buffetted, Silver Swings
Supply is the key
issue when it comes
to the price of silver,
but the extent—and
control—of supply
in this market
are not always
what they seem
FIGURE 1. Type COMXSILV <Index> GP M <Go>
Bloomberg October 1998 87
CMDTY

2. you look at fundamentals, you have a
tendency for the stocks [of silver] to
not quite tell the full truth.”
Recent and not-so-recent doings in
the silver market do much to explain
the skepticism of some traders. In
February 1998, for example, silver
rose to a nine-and-a-half-year high
of $7.28 an ounce, propelled by re-
ports of falling Comex stockpiles and
by the disclosure by Warren Buf-
fett—the second-richest person in
the United States, after Microsoft
chairman Bill Gates—that his invest-
ment company, Berkshire Hathaway,
controls 129.7 million ounces of sil-
ver, equal to about a fifth of world
stockpiles. Since then, though, prices
have plummeted as a rain of private-
ly owned silver entered the market.
Buffett has not disclosed whether
he’s hanging on to silver or bailing
out, though analysts say he’s sold
some of his stake. But overall, even
though silver has still gained 22 per-
cent for the year ending July 31,
1998, some think that Buffett, savvy
as he is, may have been taken. “I
think [Buffett] was misled by the
stockpile numbers and the tightness
of silver stocks,” says Lismore.
Investors in the silver market have
in fact been led astray before in a big
way. In 1980 silver was trading at
about $18 an ounce as the Texas
Hunt brothers were trying to keep
their rickety financial empire from
collapsing after running silver prices
up to $50. Nelson Hunt and Herbert
Hunt—who, with their brother
Lamar, once had a net worth esti-
mated at $6 billion—were ultimately
convicted in 1988 of trying to corner
the silver market. They lost an esti-
mated $1.5 billion in that effort and
paid $130 million in fines.
The Hunts’ attempt to corner the
silver market doesn’t have much in
common with Buffett’s investment.
Indeed, the biggest difference is how
much of their respective assets were
wagered in that market, says William
Davis, chief financial officer of Sun-
shine Mining & Refining Co., a
Boise, Idaho, silver mining company.
“The Hunts had everything in silver,”
he says. When they couldn’t meet
their market obligations, “they had
nothing and were impaled on their
own sword.”
Buffett, by contrast, says only about
2 percent of his holdings are in silver.
He has a reputation for long-term in-
vestments in well-run companies, not
in commodity investments.
The Hunts’ run on the silver mar-
ket and Buffett’s investment in silver
are not so much examples of history’s
repeating itself as they are clear
demonstrations of the differences
between the silver markets of 1980
and 1998. Those differences in-
clude the breadth of volatility
in the silver market, supply fac-
tors, and the regulatory environ-
ment (figure 1).
The motivations and trading tech-
niques of the Hunts and Buffett, too,
differ greatly. The Hunts, for exam-
ple, ran silver up from $11 an ounce
in September 1979 to $50 four
months later. Six weeks later, in
March 1980, the market collapsed
and silver was back to $11. By con-
trast, silver went from $4.32 an ounce
on July 25, 1997, when Buffett made
his first buy, to $7.28 an ounce on
February 5, 1998. Even with one
dominant player investing in this
market, it seems price jumps are lim-
ited during a period of low inflation.
Then there’s the matter of overall
supply. In 1979, when the Hunts
began buying, only 92 million ounces
of silver were available to investors,
according to a survey sponsored by
the Silver Institute. And at one time,
the Hunts owned more than 63 mil-
lion of those ounces. A syndicate
88 October 1998 Bloomberg
¬For the Metals Price Monitors function,
type MPM <Go>. From the menu, type
4 <Go> to monitor current Comex metals
futures prices.
Type MPM <Help> for more
information on the function
Tip Box
sponsored by the Hunts to corner the
market owned much of the rest of
the world’s silver, according to court
papers filed in 1985 by the U.S. Com-
modity Futures Trading Commission.
By comparison, Buffett’s 129 million
ounces represent about one-fifth of
the world’s supply.
R
egulation of the silver
market has tightened con-
siderably since the Hunts
made their big run. The
Commodity Futures Trading Com-
mission, the Bank of England, and
the New York Mercantile Exchange
all have taken the unusual step of an-
nouncing enhanced surveillance of
the market. Nymex bumped up mar-
gin requirements to make sure spec-
ulators can meet their obligations
should their bets turn sour.
Buffett’s full disclosure of his hold-
ings is likewise at odds with the ap-
proach adopted by the Hunts. The
Hunts used a variety of partners to
help them hide the extent of their
control of the market. The partners
included Swiss banks and members
of the Saudi Arabian royal family. “In-
formation is the enemy of manipula-
tion,” says Terrence Martell, former
senior vice president and chief econ-
omist of what is now the Comex divi-
sion of Nymex.
The different approaches to disclo-
sure reflect in large measure the dif-
fering motivations behind the two
investments in silver. The Hunt broth-
ers bought silver as a hedge. They
were convinced that their family for-
tune, built by oil wildcatter H. L.
Hunt, was on the verge of being de-
stroyed by inflation, which was run-
ning at more than 13 percent in 1979,
according to a 1980 Washington Post
article. The only true measure of
wealth soon would be in precious
metals, they believed. Buffett, though,
in an environment of low inflation,
has bought silver because his own
analysis shows the metal’s price is
bound to rise. He has noted that in
the past three years the amount of sil-
ver used for industrial purposes alone
was greater than the amount mined
during that same period. Differences
Traders in India consider high silver
prices as selling opportunities

3. aside, there is perhaps one important
lesson to be learned from the Hunts’
unsuccessful gamble that might carry
over today: the tendency of new
stocks of silver to appear very quickly
when the price gets high enough.
B
y 1980 private stores of
silver were beginning to
pour onto the market and
production was expanding
rapidly to take advantage of soaring
prices. The Silver Institute survey
showed a 200 percent increase in
overall supplies to 296 million
ounces. By 1981, 426 million ounces
were available to investors. And about
660 million ounces were available by
1996. “When silver rocketed during
the Hunt brothers’ time, silver came
out of the woodwork everywhere,”
says Tony Warwick-Ching, metals
analyst at Flemings Global Mining
Group in London. “A torrent came
out of India, and that undermined
them.”
It could happen again. Traders in
India, the world’s second-biggest sil-
ver customer, see high silver prices as
a selling opportunity. “People in this
country are not going to buy at these
[$7] prices,” says Suresh Sonawala,
chairman of Mumbai-based National
Refinery, one of India’s three largest
gold and silver refiners. “Demand is
dropping, and some people are
[even] starting to sell their silver.”
Lessons of the past, however—al-
though instructive—are not every-
one’s sure guide to the future and in
any case are never interpreted uni-
versally in the same way. Whereas
Armstrong says that “Indian demand
has fallen by 80 percent this year,”
Kaplan looks forward to the Indian
wedding season. “Jewelry manufac-
turers are on vacation now,” he says.
“Demand will be restored” when the
wedding season rolls around again.
Some even believe that if the cir-
cumstances are right, there could be
a replay of what happened to silver in
1980. “It was $50 [an ounce] once.
Why can’t it go back there again?”
says Steve Weitz, investment execu-
tive at PaineWebber in Los Angeles.
“I remember when it went up $10 in
one day.”
Bloomberg October 1998 91
Charting a silver lining
When you’re trading silver, recognizing chart patterns
can help you stay head and shoulders above the market
CHARTING IS A KEY ELEMENT OF SUCCESSFUL TECHNICAL TRADING. IT ENABLES
users to track patterns, draw trend lines, and determine support and resistance
levels relevant to specific price patterns in ways that enhance their trading decisions.
But as J. J. Murphy points out in his 1986 book Technical Analysis of the Futures Mar-
kets, technical analysis is an art as well as a science.
The art when it comes to charting takes the form of pattern recognition. A tech-
nical trader’s decisions depend on a sense of certainty concerning a specific pattern.
If weekly chart patterns indicate a market may be nearing a top, for example, then
any day-confirming pattern, such as a head-and-shoulder profile, should prompt a
run for the exit if a trader holds long positions. As the expression implies, a head-
and-shoulder pattern is characterized by a price line whose successive price levels
create a pattern resembling the outline of a human head and shoulders.
Technical analysts are well aware of such patterns—and prepared to act on them.
“Warren Buffett bought [a] large quantity of silver futures since summer 1997 and
rolled the futures contracts,” says Thierry Vignal, proprietary trader at Commodities
Corp. in Monaco. “The velocity of the uptrend reached tops in February 1998, and
prices started to decline. Big players [were then] cashing out on the March contract.
Technically, the pattern [was] clear: left shoulder, first top, decline, breaking of a
major support, [then] pullback to a lower top, the second shoulder. That’s where I
decide[d] on my trading timing: selling short.”
For an example of the head-and-shoulders pattern in the silver market, type SI1
<Cmdty> GPC D <Go> for a one-year candle chart of the silver generic future (figure
2). Trend lines often are used in conjunction with chart patterns to illustrate likely
levels of price support or resistance depending on the type of chart pattern that’s
forming. You can draw your own trend lines directly onto this chart by mouse click-
ing on the Trend Line button on the gray band above the graph. Place the cursor on
the July 1997 low, click once, and drag the mouse to rotate the trend line. Rotate the
line so it crosses the October 1997 low, and mouse click again to add the line. A sup-
port line—line A—connecting the two lows has been traced. Now repeat the proce-
dure twice to connect the October 1997 low with the January 1998 low—line B—
and the January low with the March 1998 low. The last support—line C—is called
the neckline. The head and shoulder is a reversal pattern and in this silver example,
contains, in order of appearance, the left shoulder, for the December high; the head,
for the January top; the right shoulder, for the April high; and the neckline, for the
January low connected with the March low. Using volume patterns and the neckline
connecting the lows of two declines on either side of the head confirms the pattern.
Pattern confirmation occurs when support and resistance lines appear to act as
price boundaries, keeping the price line on a path toward pattern completion. Sup-
ports get created during reactions in uptrends. Notice that each support line has been
traced by using the latest successive two lows as reference points. The strength of a
support or resistance line depends on three major elements: its length, meaning the
number of trading days between reference points; its height, or distance between
the support and resistance lines; and the volume of trading in it. The last doesn’t
apply to foreign exchange trading. The higher those criteria, the stronger the sup-
port or resistance. Low volume means there’s little interest in trading at specific price
levels. It means those levels offer weak resistance or support, and some breakouts
through resistance or support levels may occur.
The chartist’s art is to filter phony breaks from valid ones. It holds true for any pat-
tern in technical analysis. You can judge the validity of breakouts as signals by pre-
defined rules set up to filter out false breakouts—for instance, how far a price moves
beyond support or resistance levels, or the number of days the closing price is above
resistance or below support levels. Once major levels have been broken, the trend is

4. ripe for a reversal.
Ofthethreelinesdrawninfigure2,supportlineBofMarch1998showsadown-
ward breakout occurred followed by an area of few price transactions—and a
sharpmoveup(figure3).Notraderswantedtoargueatthoselevels.InlateMarch
through early April, prices moved back above support B. By the second week of
April, a second break of support line B occurred. Finally, in May, a breakout of sup-
port line C—the neckline—was followed by a breaking of support line A.
When you analyze those breaks in the vicinity of support B, you’ll notice that
the first break and the subsequent gap were on lower volume. Activity is then
resumed above support B with noteworthy volume. Notice, however, that vol-
umes were higher during the July/August 1997 and October/November 1997
periods—when prices started to trend and for which you traced support A.
Silver contract volumes before the neckline break were drying up. Prices de-
clined to break the longer-term support
line A on low volume. The head-and-
shoulders top marked the end of the
silver uptrend.
Head-and-shoulders patterns have
their own typical volume patterns. Vol-
ume usually is lower on the head than
on the left shoulder, and it’s much
lower on the right shoulder as the pat-
tern is nearing completion. Volume
tends to increase when prices break the
neckline, and volume is thin when a
pullback to the neckline occurs. Such is
not exactly the case in our example,
however. As explained previously,
breakouts may happen on low volume.
Although the head-and-shoulders pat-
tern is one of the best-known and most
reliable patterns, traders know that
casebook examples rarely appear in the
real world. Usually, once the neckline’s
been broken, the minimum price objec-
tive is the vertical distance from the
head to the breaking point, or neckline,
projected downward.
Trend lines, as this example demon-
strates, can help traders decide when
and how to enter or exit the market,
can fine-tune a trade, and can help in
determining when to place protective
stop orders at logical levels. Finding re-
warding trades by means of charting
techniques that use trend lines and
support and resistance indicators is the
hallmark of experienced technical
traders. Using the Bloomberg service in-
stalled on your PC to add trend lines to
technical indicators is one sure way to
keep your own head on your shoulders
and above any market waters.
Jean-Marc Bloch is on the staff of the
Bloomberg Sales department in London
92 October 1998 Bloomberg
FIGURE 3. From the Candle Chart, mouse click once on the Copy Line button,
once on line C, and once on the first shoulder high in late December 1997. This
copies a line of key resistance as the last shoulder of the pattern is completed
FIGURE 2. Type SI1 <Cmdty> GPC <Go>. Use the Trend Line button to add lines
connecting the head-and-shoulder reference points as shown
Whichever way the inventory sup-
ply debate turns, traders agree the
market will remain volatile. “Silver is
a small, small market,” says Kaplan.
“When a storm comes raging, the
[small] ship is more easily tossed.”
¬Any comments? Type MAGAZINE
<Msge>.Forreprints,typeMAGZ <Go>.
Joseph Giannone and Mark Pittman
write for the New York bureau
of Bloomberg News