From Futures Magazine, April 30, 2011:
Henry Jarecki has taken several career paths and has excelled in each. While already a distinguished psychiatrist and Yale professor, he became involved in the cash metals business, even taking over leadership of the 300-year old London bullion house Mocatta & Goldsmid. As head of Mocatta he helped stabilize the silver market following the Hunt brothers’ ill-fated corner attempt in 1980. He applied the windfall he received from liquidating his stake in Mocatta to create a passive long-only commodity strategy before there was such a thing as the Goldman Sachs Commodity Index. He founded Gresham Investment Management where he deploys his Tangible Asset Program (TAP). As TAP continued to outperform other investible indexes, he offered it as a fund through Gresham. Jarecki has started numerous successful businesses, produced movies, is on the staff of Yale and is involved in numerous board and charitable foundations. We spoke with Jarecki on his career in metals.
Futures Magazine: Dr. Jarecki, you already had established a career in medicine and academia when you became involved with the Mocatta Metals Group and helped form its U.S. affiliate. What drew you to this?
Henry Jarecki: My family was involved in medicine and academic medicine on my father’s side and on my mother’s side was involved in commerce and merchant shipping and trading. So after some time in the practice of medicine and becoming a professor of psychiatry at Yale, I got interested in trading businesses at the beginning of [a periode of increased] public interest in silver and gold. There were arbitrage opportunities between the British market and the American market, and there were different forms of silver available that had different values among them. The silver certificates, which were American bank notes backed by silver, [were one]. There were opportunities in buying one kind of silver and selling another in a different market.
FM: Did you have an inkling that the dollar peg to gold would end?
HJ: If you think about commerce, you get to thinking about inflation. I was German born so it was natural for me to have known through my family about the German inflation that was pretty dramatic. So you think, ‘Are there government solutions to the problems of inflation?’ Problems of inflation had just come up in the period since paper money was issued and became more the way of buying and selling things. Before that, metals themselves were money and [then] surrogates for that metal money emerged and during that time inflation had become more common.
FM: What did the end of the gold peg mean for your business?
HJ: It certainly made it much more active. There was no trading in silver before the early 60’s. The U.S. government, because of the silver certificate, had established a price for silver, a price for which they were willing to buy it and to sell it. They were buyers and sellers so there couldn’t be a trading market. But after the early 60’s, they stopped making a two-way market in silver and that led natural market forces to prevail, which they did. Gradually the price of silver increased and when it did so, the bank notes (silver certificates) came to have greater and greater value: $1, $1.05, $1.10, $1.50. People would buy them in order to acquire the silver involved. It was a complicated process. The contract was $10,000 an ounce and it took about $13,000 silver certificates to buy one. At the top of 1 out of every 4 bank notes it said, “Silver certificate, pay to the bearer on demand $1 in silver.” That was understood to be 0.7734 ounces. I set up an organization to buy these from the public at large and bought many millions of them. I turned them in and got silver in return and ultimately sold that silver on the exchanges.
FM: What was your primary role with Mocatta?
HJ: I established an enterprise called Mocatta Metals. I called up Mocatta and Goldsmid in London (a 300-year old bullion dealing house) and told them my ideas for an arbitrage program, which was based on the difference between U.S. and English interest rates. To my surprise they said, ‘That is a very good idea, we will support this idea completely.” I made an agreement with them. They were superb, they supported it to no end and that went well for a year. At the end of that year the U.S. government stopped issuing silver certificates. I was chairman and chief executive. I came to take over the management of all of the Mocatta Companies and we [streamlined] them to work together. In 1986 my partners, which by that time included a British bank called Standard Chartered Bank, concluded that they wanted to own all of the company and made a proposal to buy out my shares. They took over that company from 1986-89. So I had moved from being chief executive in New York to being international chief executive shareholder and ultimately sold those shares to Standard Chartered Bank.
FM: How did you become involved in the futures markets?
HJ: Because we traded in silver both in the physical markets and in the overseas markets, as part of the overall arbitrage book, we would use the markets here. We bought seats on the Comex (New York Commodity Exchange), Chicago Mercantile Exchange and Chicago Board of Trade. That gave us arbitrage opportunities to buy in one center and sell in another. More important, if you owned a seat you could do brokerage for others. In those days you could function as a broker for other brokers. We would do trading with a company in Chicago and they would clear our trades and we would clear their trades in New York. So we became futures brokers ultimately. Then I got involved in a lot of industry issues and Leo Melamed asked me if I would serve on the board of the International Monetary Market (part of the CME). I served on that board, I served on the board of the CBOT and Comex and we traded on all of those markets. Ultimately if you are active, you wind up having to work on government affairs and tax issues. We formed Brody White to handle the futures brokerage. During that time it was not permissible for an enterprise owned in part by a bank, which Mocatta was, to do brokerage (that changed later). We eventually sold it to Fimat (now Newedge).
FM: You were on the board of Comex at the time of the Hunt brothers attempt to corner the silver market. Explain what happened, both from the perspective of an exchange director and the head of a precious metals dealer.
HJ: It was an incredibly complicated story, certainly when you are on the inside of it. We saw that there was more and more buying being done by one enterprise. They were buying a lot of physical silver, they were buying silver futures and we weren’t even sure it was the Hunts initially. There were [surrogates buying silver]. The had brokers who would stand up in the ring and say, ‘Limit up for 1,000 lots.’ People would sell to them. They would come in the next day with bright red jackets so nobody could mistake who they were and shout again, ‘Limit up for 1,000 lots.’ Sure enough, the market went up limit, limit, limit. By the end it was up to the $40, $50 level. A large amount of silver was being gathered physically and very big futures positions were being taken by these enterprises. Of course the futures positions were not of as much risk because the exchange has the authority and the mandate from the regulatory agency to prevent corners and to prevent manipulation. The Comex board eventually concluded that it would [allow] trading only for liquidation, which meant that in the spot month everybody had to get down to a limited amount where people could swap real physical silver with each other and couldn’t have giant positions, and that is what ultimately happened in 1980. By that time the American public was pouring silver into pots that ultimately the Hunts were buying and storing and sending out of the country trying to make a great commotion. They bought an awful lot of silver; they must have had $5, $6, $7 billion worth of silver at the end. And this enormous onslaught of physical silver emerged, keeping the refiners full month in, month out, but as it all came onto the market they simply couldn’t absorb any more.
At the time I wrote about the principle that everybody will try to recognize in attempted manipulations: “Not everyone can leave by the same door.” The moment the first few lots get sold and the market goes down a bit, the margin calls come up. More margin is needed to maintain the long position and people sell some more of their silver to meet that margin call and ultimately the market crashes. The big effort to corner can’t be maintained.
What the Hunt brothers did was to buy an enormous amount of physical silver. If you don’t buy the physical object you cannot have a corner because the longs and shorts in the futures market even each other out. Nobody is going to go short if he hasn’t got the product. [Trading physicals], a long can go long but the other side has to have product to go short. In the futures market the longs and shorts must, before the first notice day, even themselves out.
FM: What was your role as a dealer?
HJ: During the days that the Hunts were buying physical silver, we dealt with them because we were the largest bullion dealers in the world, and they were able to buy an enormous amount of silver through us. In one single trade we sold them $450 million worth of silver in October of 1979.
In 1980, at the time that they had these very large positions and they had borrowed money from their various brokers, the silver market was starting to fall $50, $45, $40. So they had to get out and people came to us and asked ‘What are we going to do with all this silver?” The Hunts didn’t have the money to repay; they had been operating with leverage. We put together a syndicate where we offered to buy $1 billion or more worth of silver in one trade to clean out the market — by that time it was down to $12 or $13 per ounce. We were able to put together a syndicate to buy out the overhang in the market. Interestingly enough, Mocatta had done that on other occasions. In 1913 an Indian speculator bought up a great deal of the London silver stock. (The corner attempt failed when the Indian government would not buy the silver from him and after he went bankrupt the Bank of England asked Mocatta to buy up excess silver.)
FM: What was the long-term impact on futures markets?
HJ: People started to get more realistic about the margining requirements, [making] sure that one had a mathematical approach to margins [so] the exchanges would operate safely. It called a lot of attention to the futures markets and to the silver market. I am not sure it had a great long-term effect.
FM: What led you to develop the Tangible Asset program (TAP) in 1987?
HJ: I sold Mocatta in 1986. Standard Chartered had discussed buying Mocatta eight or 10 years earlier, so it gave me an opportunity to put together a team — knowing that we would get a lot of money for it — [to think] about what you do with a lot of money. How do you manage it so that you make a good return without much risk and put together a risk-disbursing portfolio that consists of short- and long-term bonds, domestic and foreign stocks, commodities, gold and currencies? I gradually developed that concept into which I have put a lot of the assets I gathered over the years. I didn’t want to gamble with the money I worked hard to earn. The commodity section of it had it own life, its own rules, and I had to think very thoroughly about the details of it. What commodities? You can’t just say I am going to put $1 million into commodities. What kinds? Do you want to be represented in all the classes: Industrial metals, precious metals, livestock, agricultural, energies and so on? You have to figure out how much you want of each kind. How often do you want to rethink that? How often do you want to calibrate it? To create a system to do all of that and to think through how to do it, took the eight years I had between the time I learned they wanted to buy Mocatta and the time they actually [paid] for it. There were a lot of people, starting I guess with Goldman Sachs, that started to think about putting commodity futures into a portfolio and offering that to investors. We did that for ourselves. We originally hoped [to utilize the other indexes and save work] but we were dissatisfied with [their] portfolio. The same [thing happened with the AIG Index]. It had its own flaws. We just kept working with our own portfolio and it was very successful; its returns were consistently better than the other commodity futures indexes....
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