Evidence that Warren Buffett manipulated the silver market in the late 1990s

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I have long been sickened by the hagiography surrounding Warren Buffett. St. Warren’s reverence has peaked lately, as he is Obama’s guru, offering protection against accusations that the president is anti-corporate and covering up Obama’s plans to raise taxes on rich. After all, if a man richer than God is on your side, how can you be a class warrior?

My cynicism about the Saint Buffett dates back almost exactly 14 years. There is substantial evidence that in February 1998, Buffett cornered the silver market.

I repeat: there is substantial evidence that Warren Buffett cornered the silver market. Cornered, as manipulated. Yes, Saint Warren was almost certainly a manipulator.

The story in broad strokes. Starting July 25, 1997, Buffett began hoarding large amounts of money Going through Phibro, a subsidiary of Salomon Brothers, an investment bank in which Buffett had a large stake and which he saved from extinction when Salomon traders cornered the two-year Treasury market in 1991. He eventually acquired nearly 130 million ounces of silver.

He stood for big deliveries in February 1998. The market went crazy. All clues of a corner were present. Nearby prices have skyrocketed from spring delivery prices. The following graph illustrates the difference between the March 1998 COMEX silver price and the May and July prices.

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Note that the spread exploded when Buffett showed up for delivery, during the first week of February, with the March-July spread rising from -0.2 cents/oz on 01/29/98 to 20 cents/ oz on 2/5/98. The March 98 price rose $1.25 an ounce (about 20%) during this week.

The London locomotive hire market for cash also showed acute signs of tightening. (The rental rate is the cost of borrowing the metal. If you need money fast to make the delivery, you’re willing to pay a big premium for nearby delivery, i.e. you are willing to pay a lot to borrow/lease money. Formally, the forward price of silver is the spot price multiplied by one plus the interest rate minus the lease rate. If the lease rate is very high, the futures price will be lower than the spot price: i.e. the market is in backwardation.)

This represents a month’s rental rate for the money. Note that it skyrockets just at the time of deliveries. At the beginning of February, the rental rate stood at 75% annualized (some press reports indicate 80%).

Click to enlarge:

There were physical distortions characteristic of compression. People all over the world rushed to get cash and transport it to London, often by plane. The silver market in India, a major consumer, almost closed:

But over the past two months, work at the refinery has slowed down, because of a man halfway around the world. Until a few days ago, most Indians had never heard of Warren Buffett. They even misstate its name, confusing it with buffet. No matter. Since last October when Buffett started buying silver, imports into India have almost stagnated as Indians decided the metal was too expensive. Today, more and more Indians are selling their silver tableware and jewelry, which now sells for $7.25 an ounce, 20% above the normal $6. That makes for an interesting comparison: 960 million Indian sellers versus a billionaire Omaha buyer. “To say [Buffett] it cannot last,” thunders merchant and refiner Mukul Sonawala. “Indians say the price is too high. They say, ‘Mr. Buffett, do your buffet, we’ll wait for the price to drop. Bye.”‘

There were delays in processing the influx of money into London: the official weighers could not keep up. The London Bullion Market Association reacted to the bottleneck by extending the normal delivery time from 5 days to 15 days.

There was plenty of money in New York, but Buffett didn’t buy it there, even though it was cheaper there (more on that below). Instead, the silver was shipped from New York to London, mostly by airfreight (!), where it had to be re-analyzed because the assay marks came from a company that no longer existed. This created another bottleneck.

As soon as deliveries were completed, prices, spreads and rental rates crashed: on February 27, the London price had fallen 22.5% from its peak, and rental rates had fallen at the level they were at before the frenzy started immediately afterwards. from a Buffett press release (see below). These changes in price and price relationship are also symptomatic of a turn. These are manifestations of what is often called “corpse burial” – a phrase I have been accused of coining.*

What did Buffett have to say? This (February 3, 1998):

In 1998, Berkshire accepted delivery of 87,510,000 ounces under the terms of the purchase contracts and the remaining contracts for 42,200,000 ounces call for delivery on various dates through March 6, 1998. To date, all deliveries were made on time. If a seller encounters difficulty in making timely delivery, Berkshire is prepared to defer delivery for a reasonable period upon payment of a nominal fee.

More than 30 years ago, Warren Buffett, CEO of Berkshire Hathaway, made his first purchase of silver in anticipation of the metal’s demonetization by the US government. Since then, he has followed the fundamentals of money, but none of the entities he manages own them. In recent years, widely published reports have shown that bullion stocks have fallen dramatically, due to excess user demand over mine production and reclamation. Therefore, last summer, Mr. Buffett and Mr. Munger, vice-president of Berkshire, concluded that the balance between supply and demand could only be established by a slightly higher price.

On which I call Bull!

If this was a long-term investment, why did Buffett take delivery at a huge premium over deferred pricing? If he was betting on long-term fundamentals, why not sell silver nearby at its huge premium and buy silver at a much lower price for July delivery, for example? If he were right on the fundamentals, the July price would rise as “equilibrium [was] established.”

Taking delivery at a higher price was actually foolish, if the goal was to invest for the long term. Buffett paid a premium of around 45 cents/oz to get the cash in early February. He was buying high and selling low. If he wasn’t manipulating and his trades weren’t causing price distortions, he could have sold spot silver, bought silver for delivery in a month, and picked up 45 cents/oz doing so (at the instead of reporting for delivery). Warren Buffett didn’t get so rich by being so stupid. No, the evidence clearly shows that he had another very short term objective in mind.

In other words, if Buffett had acted only as a long-term investor, why would he need people from all over the world – as far away as India – to scoop up all the money they could find? , put it on planes, transport it to London, queue for customs to be delivered within five days (later extended to 15 days)? Why did Mr. Long Term need money during these 5 (15) days? What was the big rush, if he had a long-term vision?

And why did he need it in London? This chart illustrates the difference between the price of silver in London and the March COMEX futures price. Note the spike when Buffet was taking deliveries in early February. At the margin, he paid a premium of 56 cents/oz – nearly 8% of the New York price – to get silver in London in early February rather than getting it in New York. Also note that the bounty crashed after the bottleneck was removed.

Click to enlarge:

The answer to these questions: Requiring delivery in a short period of time to one location had nothing to do with a long-term view of money. It was a wedge, pure and simple, exploiting the frictions involved in funneling large amounts of cash into London on short notice. This made delivery very expensive, allowing Buffett to lend money very profitably at the inflated rental rate. He created an artificial scarcity and probably profited accordingly. An investor acquiring silver on the basis of a long-term view would try to minimize costs by buying at the cheapest places and dates. Buffett bought a lot of money in the most expensive place and on the most expensive date.

And note the little insult that Buffett added to the economic damage:

If a seller encounters difficulty in making timely delivery, Berkshire is prepared to defer delivery for a reasonable period upon payment of a nominal fee.

A reasonable time. A modest fee. How holy. Note again: the market rate to defer delivery for as little as a month was as high as 75% on an annualized basis. In dollars, about 45 cents/oz (6% of the price) to defer delivery for a month. Does that sound “modest” to you? Not for me. Sounds like the actions of a purely long-term investor, who shouldn’t need to get the money NOW? Couldn’t a long-term investor wait a month? Wouldn’t a long-term investor want to buy in the cheapest place, not the most expensive?

The rental rate tells you exactly what those “low fees” were. Deferring delivery for a month costs 75% annualized, or more than 6% per month. It’s not even that modest for loan sharks.

No, the market showed acute signs of shortage, and this shortage had a cause: Buffett standing up for huge deliveries.

So keep that in mind when you hear Buffett praised to heaven. He is more than willing to play smash mouth to add to his fortune. He is also very willing to lie about it and morally assert that he is doing those he breaks a favor.

Doesn’t sound too holy to me.

* I wish. In fact, the phrase originates from PD Armour, a famous Chicago grain and meat magnate in the 19th and early 20th century. (You might have had the Armor chilli, same company.) He was asked if it was easy to corner the market. He replied that it was like murder: “To commit murder is very simple, the problem is to bury the corpse”, the corpse being the excessive quantities of the goods delivered to the market, which the cornerer had to unload later at loss .


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