Silver Squeeze

In London, on the world's biggest free silver market, the price of futures in silver last week rose to 92 7/8-c- per oz. This was a mere quarter of a cent over the current price, but it represented the biggest futures spread in 19 years. The fraction was small, but in the tight silver trade it was a lot. It was also a warning signal, as London silver brokers Mocatta & Goldsmid Ltd. put it with characteristic British understatement, that "those, who take a longer view are inclined to foresee a deficiency of silver." Consumption of silver in industry and in coinage is far outrunning mine production (see chart), and London silver merchants are convinced that short supplies will soon send silver prices upward.

Unlike gold, whose recent London price spurt bedeviled the U.S., a rise in the price of silver would be good news to the U.S. Treasury. The Treasury's vaults have had an unwanted silver lining ever since the Silver Bloc of Western Congressmen pushed through the Silver Purchase Act in 1934. That Depression-inspired law requires the Treasury to buy silver at an official price whenever U.S. silver producers want to sell, until its holdings equal 25% of the federal monetary reserves. The official price was set above the free market price and has since been raised twice to keep it there.

The Silver Hoard. With this guaranteed subsidy, U.S. silver producers overproduced, and the Treasury was forced to spend hundreds of millions collecting silver. By 1943 the U.S. had a gigantic silver hoard of over a billion ounces. It had so little use for it that during the war the Treasury lent some to private industry for such mundane purposes as electric-conducting bus bars in aluminum plants.

Despite these high prices, many low-yield U.S. silver mines proved unprofitable and shut down. Today about three-quarters of all silver mined in the U.S. is a byproduct of lead, zinc or copper mining. In the past decade the world's consumption of silver has oustripped production, although the supply is increased by melting down and reusing the metal.

The free market price began to climb, finally inched permanently past the Treasury purchase price of 90 1/2 in 1956. In the past two years the price has been high enough to permit the U.S. to begin to unload its huge supply. Last year the U.S. was able to sell off nearly 20 million oz., had to buy only 1,000,000 oz., since U.S. silver producers were able to get a higher price in the free market.

Recoining the Franc. Thus far Treasury officials have been happy to get rid of all the silver they can. They are not worried by London fears that the U.S. will run out of silver in the next few years. The U.S. still has 122 million oz. in its free silver vaults--over and above its vast monetary reserves. Although the mint dips into the free silver stocks for some 40 million oz. for new coins each year, the Treasury can always stop selling silver if its stocks drop dangerously low. The Treasury argues that special circumstances have recently affected both supply and demand. Mining strikes have cut production, and demand has been temporarily increased by such factors as France's creation of the new "heavy franc." So far France has taken 40 million oz. toward coining the new franc, with 20 million oz. more to be delivered.

Now that the free market price has risen above the official price, the Purchase Act's provisions have backfired. Where once the Treasury kept the price artificially high by buying at 90 1/2-c- per oz., now the Treasury is keeping the price artificially low, since it sells at nearly the same price. The Silver Bloc no longer seems powerful enough to persuade Congress to raise the official price again--partly because of the opposition of the growing number of new industrial silver users (industry and jewelers use about 100 million oz. of silver a year). The result is a silver stalemate that makes it possible for the first time in years to free silver from politics. If the Treasury was required to buy silver only for its curency and coinage needs, the silver market would become a free market.

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