Earth 64165 640

Fishing Sends My Friend to the Big Leagues

November 23, 2016

Chapter 27 in the exclusive series for Dynamic Commodities- becoming a commodities trader

After I was in the department for six months or so, the chief silver trader John Mihale announced one morning that he quit. Mihale ran the mega profitable silver business in 1979 and 1980, when the price ran up to $50 per ounce as Nelson and Bunker Hunt took a massive long position in silver.

The Hunt brothers began buying silver futures in the mid-1970s. As the price of silver appreciated, they used the profits to add to their long position. The leveraged, growing long position used profits to pay for margin on more and more contracts resulting in an unstable pyramid position. By the time silver moved to its all-time high of $50 per ounce, the Hunts controlled around 200 million ounces of silver or $10 billion worth of the metal. In 1980, $10 billion was not just a lot of money. It was an incomprehensible sum.

Precious metals tend to be harbingers of inflation when prices rise. The U.S. government became concerned about the Hunt’s attempt to corner the silver market.

Ray Nessim was a governor of the New York Commodities Exchange, the futures market that housed the major and most active the silver futures contract. Silver cascaded lower when the board of governors voted for a liquidation only rule in silver. They did this because the banks and government regulators became concerned that the silver market was out of control and would impact the overall economy. The liquidation only rule meant that the Hunts could no longer buy silver futures. They could only sell. Like a game of musical chairs, the liquidation only rule was an end to the music.  Nelson and Bunker Hunt were the only ones left without a chair. The price of silver fell like a stone.

Since Ray Nessim was one of the decision-making governors of the exchange, Philipp Brother’s traders positioned accordingly. As a result, they made a mint. The Hunt Brothers made a large oil fortune into a smaller one. However, John Mihale made most of the department’s money buying old silver coins and scrap metal. Then, refining it into bars and delivering it to the exchange against short positions. On the way up, the margins for this arbitrage and refining business became so wide that the profits were astronomical. In 1980, Ray Nessim’s department made over $100 million in profits. It was Mihale that made the bulk of those profits.

Furthermore,  John Mihale received a massive bonus for his amazing performance and profits. However, he had a difficult relationship with Nessim, who was a demanding boss. The morning that he quit, he simply announced to the entire department that he was going fishing and would not return.

I had worked in the telex department with Peter Neumann in summers. Peter was a Philipp Brothers lehrling, a few years my senior. His first assignment after graduating college was the precious metals traffic department handling silver. After the untimely departure of his boss, Nessim promoted Mihale’s assistant, Jimmy DiPiazza. Jimmy selected Peter to be his assistant. Peter Neumann, a friend and colleague, moved over the high wall from traffic into trading.  I thought to myself, Wow, Peter hit the big time! It got me thinking a lot about my future.

Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

Post Series: Origin Of A Commodities Trader

Leave a Reply