So now we’ve seen an asset-market reaction to the social media trolling regarding silver. Like GameStop, silver became the flavor of the week.
At Cumberland, we don’t own silver. There is one strategy that may own it from time to time, and it doesn’t hold it now. We can also own the miners in ETF form. Currently we do not hold those miners’ ETFs. We do own ETF exposure in companies that involve materials, commodities, natural resources, containers, packaging, and chemicals. Those positions are focused on the economic recovery we expect to unfold during the post-COVID period, after the vaccine rollout gains full steam.
So for us at Cumberland, the flavor of the week theater is interesting but doesn’t direct our portfolio management decisions.
We do, however, look at these narrative-driven and social media trolling elements for risks of contagion and credit-market impacts. Does a hedge fund in trouble lead to a market-wide credit event? Many will remember the 1997–1998 experience with the Long Term Capital Management hedge fund and the market shock that was triggered by its problems (https://www.investopedia.com/terms/l/longtermcapital.asp). But we do not see a credit event arising out of the silver price spike or from the GameStop affair.
Let’s look at silver though several lenses.
The chart below shows the 100-year history of the nominal price of silver. The chart shows the recent spike in context, and we could certainly say that it was an abrupt and serious rise in the price.
(source: https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart)
Now let’s look at the same series adjusted for inflation. (This series uses the Consumer Price Index measure for inflation. The shape of the series would look about the same if we used other inflation measures.) What jumps out at once is that the recent inflation-adjusted rise in the silver price is really quite small when it is put in “real terms.” We acknowledge that silver trades in nominal terms and in contracts denominated in US dollars.
(source: https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart)
The towering peak reached by the silver price in early 1980 was caused by the Hunt brothers’ attempt to corner the silver market. Fearing escalating inflation and a precipitous drop in the value of the US dollar and dollar-denominated assets, Herbert and Nelson Hunt sank their oil-money inheritance into physical silver and silver futures and achieved control of over two-thirds of the silver market, causing the price to rise tenfold, from about $5/oz. to nearly $50 at its peak.
Then federal regulators stepped in, temporarily rewriting the fundamental rules of the commodities market to prevent any more long-position contracts from being written or sold for silver futures. The price of silver began to fall, and margin calls on the loans the Hunts had taken out, along with storage fees and interest, began to cost them millions a day. Finally, on March 27, 1980 (“Silver Thursday”), the Hunt brothers finally missed a margin call and silver plummeted to under $11. The brothers were able to arrange a private bailout from a consortium of banks and companies, but they were hauled up in front of Congress, charged with manipulation, fined, fined again, and forced into bankruptcy.
(“Silver Thursday: How Two Wealthy Traders Cornered The Market,” https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp)
So what should we believe about silver?
Well, we do know it has a use as an industrial metal, and the extent of that use can be estimated.
We also know it has a precious metal monetary component. And a jewelry component. And it has a long history. These things are very difficult to value. Some point to silver’s close relationship with gold.
Ancient historical sources have mentioned precious metals as long as written history has existed. We can read about silver as the trusted reserve currency when the Athenian owl was represented on the one-drachma coin. Athens extracted the metal from its silver mines at Laurion, about 30 miles south of Athens. The Greeks didn’t dilute the weight or monetary value of their coinage, so Greek silver coins were trusted for centuries. In those days, after Greece prevailed in war with gold-oriented Persia, the ratio of gold to silver by weight was valued at 16 to 1, according to scholarly research. We can read that history in an English translation of Thucydides or in historical treatises like Sidney Homer’s magnificent A History of Interest Rates (https://www.amazon.com/History-Interest-Rates-Fourth-Finance/dp/0471732834).
We will leave it to readers to determine what “glitters.” For us, the warnings of the markets are the lens through which to view our current period of false narratives and social media trolls. As they are in politics and science and medicine, often poorly informed, social media-based players are active in finance and markets.
Caveat emptor!
David R. Kotok
Chairman of the Board & Chief Investment Officer
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