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.
FM: Why did you decide to offer this as a fund?
HJ: There came a time in 2005 when we started talking to a large brokerage house about marketing it separately. We did that and a lot of people had great interest. [Because] our returns stayed higher and our volatilities stayed lower, more and more people flocked to us. We have about $14 billion worth of commodity futures assets that we manage for pension funds [and] sovereign wealth funds, but it came essentially out of my own portfolio.
FM: Prior to the credit crisis Congress was looking to put restrictions on funds such as yours because some felt long-only commodity investments were driving commodity prices higher. Despite the historic credit crisis, Congress and regulators are looking at your space again. Why the urge to demonize speculators?
HJ: The drama occurred in the midst of the credit crisis. It was after the 2008 election that a new regime came into the Commodity Trading Futures Commission (CFTC) and the thought emerged that position limits would be a good idea. At that time they were starting to ease the money supply, there was more and more money sloshing around. Before 2008 everyone took the view ‘let the markets take care of themselves.’
People always have tried to find scapegoats of some kind for rising prices. I don’t think that what firms like ours do for our clients is speculation or has any influence on the prices of the futures markets. What we do doesn’t satisfy any of the criteria of speculation. We don’t select which commodities our clients should buy based on our belief that they are going to go up. We try and give them an exposure to a broadly diversified basket and we undertake a calibration of the portfolio once a year based on global production, trade values and the liquidity of the futures markets associated with them. We just want to give people exposure to commodities because we think that anybody who owns stocks and bonds will have a lower volatility in their overall portfolio when they add commodities to it. What we do isn’t secret, it isn’t undisclosed, we publish it. We don’t employ leverage, we don’t let our clients employ it, we require the clients fund it with a 100% of the notional value of the futures positions. It is odd to call what we do speculative. I have never seen any effort at manipulation or heavy speculation without leverage.
FM: What do you see as the flaws in the CFTC’s current spec limit proposal and its overall approach to products like yours?
HJ: They are proposing to leave agricultural limits as is, which have not been changed since 2005. Their current proposal is a formula approach based on open interest [that] they want to use for metals and energies. The proposal as it currently stands leaves ags the way they are. They call that ‘legacy limits.’ The other two options would be to move them to the level the CME proposed in 2009 based on current data or they can do what they are doing with energy and metals based on current data. We want to make sure they don’t make a distinction for ags. If you are going to use a formulaic approach based on open interest for commodity markets, it should be for all commodities, not just energies and metals.
FM: You became involved in markets on the cash side. Is part of the problem that some who blame speculators only look at futures and not the entire physical market?
HJ: The CFTC has this idea that the futures market precedes the physical markets. They think that if they can only limit the positions that would keep the prices low. One of the regulators was heard [saying] at an early meeting that they were not going to have $170 crude oil prices while we are around, and people think that that is what they can achieve by it. But prices go up and prices go down irrespective of the amount of futures trading that goes on. It is kind of naïve to think that position limits can affect it. Blaming futures trading for higher or lower prices is like blaming the thermometer for a heat wave or a cold snap. They are derivatives so their prices are derived from the underlying physical commodity, not the other way around. The futures are much smaller than the physicals. The idea that the futures tail can wag the physical market’s dog is absurd, but you could talk yourself blue in the face. The passage of Dodd-Frank makes it almost certain that position limits are going to be imposed on the futures market and the open interest formula —10% of the first 25,000 lots of the prior years’ open interest and 2.5% after that — that is alright, it shouldn’t have too much of an impact. The one piece that is incomprehensible is the treatment of limits in the agricultural markets. There they want to leave in place the legacy limits, despite the fact that that formula was first proposed to set limits in those ag markets.
FM: While some opponents of passive long-only commodity funds have recommended draconian measures like using margin to restrict longs; these are finite markets. Doesn’t capacity become an issue at some point in these strategies?
HJ: The overall size of these markets has gone up much more than the amount of investment in indexes. It means we have been helpful because in a way we are bringing in more commercial hedgers.
We are really just liquidity providers. The scary thing about the ag market is the proposal is not just saying leave the status quo, they are talking about leaving the limits where they are and now bringing in all swap OTC derivatives on exchanges and subjecting them to the same limits. So you are talking about a massive reduction in the amount of long speculative liquidity that is coming to market in the form of OTC contracts. You are not talking about status quo, you are talking about a significant reduction.
In a market where the long-onlies would become bigger, who would the shorts be? Would there be some shorts speculating that the markets would go down in a heavy inflationary world? Maybe, but it would take a giant amount of courage to be short these markets. What is happening is that yes, there are long-only purchasers, but who is selling to them? It is the commercial hedgers who are selling to them. It is astonishing that anyone would want to get in the way of this commercial transfer.
FM: It seems we have come full circle with silver. Some are talking about manipulation in silver, which has outpaced gold in recent years. Silver is approaching its1980 high. Compare what is going on with silver today with 30 years ago.
HJ: I believe in relatively random markets and I don’t see evidence of manipulation of gold or silver markets, but anything is possible. Over centuries people periodically have decided they want to own a lot of gold or they want to own a lot of silver. Certainly with the uncertainties about paper money I wouldn’t be surprised — somebody told me today that the gold refineries are working 24 hours a day trying to create physical gold for the people of the world so why should it be surprising that people want to have their assets in precious metals with all of the strengths of monetary metals? There are a lot of good reasons for people to put assets into gold and silver. The relationship between gold and silver is not different. Gold is much higher in relationship, it is a 35-1 ratio, traditionally it has only been a 16-1 so silver prices related to gold prices are pretty low.
FM: Is the current price of precious metals based on traditional market fundamentals or on metals as an inflation hedge?
HJ: I don’t really know the difference, because traditional market fundamentals include the value of money, and that has always been the case with precious metals. For people who think historically, precious metals are money, everything else is a paper representation of money. Gold is one of the most plentiful objects in the world in terms of its relationship to use; water is one of the rarest. Without rain the world would be parched within six days. You can go 40 years without gold for industrial production.
FM: Care to predict where gold, silver and copper will be by year-end?
HJ: That depends entirely on what happens with the monetary status. [Currently], it doesn’t look like a very stable world and in an unstable world people go for tangible assets. It is true that in a depression people say, ‘We don’t need these objects anymore,’ and commodity markets go down. So the request for pricing on commodities is really trying to predict the future: Is there going to be a depression or inflation? Is there going to be war or peace? I don’t think it is answerable because the questions are simply too big.
You are [really] asking, ‘Will it be possible for the world to once again get control of the money supply?’ Will the struggle of today, which is don’t cut the money supply because you are going to put people out of work, overwhelm the fear that if you don’t do something about the money supply there is going to be runaway inflation. You don’t know which one is harder on the people of the world. Runaway inflation in Germany in 1923 and onwards was devastating and had an enormous impact on the morale of the German middle class. In many people’s view [this] ultimately led to the demoralization that eventuated in the rise of the totalitarian parties in Germany and ultimately the takeover by Hitler. People get demoralized, they save all their lives to put together a little nest egg and 10 years later they can use their nest egg to have lunch.
FM: While in the midst of numerous challenging careers you have launched companies, purchased islands, taught psychiatry and produced movies. How do you find the time?
HJ: I don’t know. You just wander through your life and one thing or another comes up that seems interesting and you get involved in it: I run a biotechnology company that looks for patterns in drugs, I wrote a text book in psychotropic agents some years ago and I always have been interested in the development of medications for psychiatric disorders. I have a group that does natural history science studies in the Caribbean. I get interested in a lot of different things, all of them fun; I have great colleagues who support me in it, it is all good stuff. There is nothing you can’t do if you are willing to work 15 hours a day, seven days a week. It is a reflection of what I call Jarecki’s law of time, which is if you are working 10 hours a day you can get four times as much done as when you work five hours a day because you don’t have to communicate. You are saving all that communication with colleagues or you are maximizing the amount of communication you can have with colleagues. I believe that a lot of the breadth of things I have been lucky enough to do comes from that principle.
FM: Before you were involved in markets you were a highly esteemed psychiatrist. How has your medical training helped you in your business career?
HJ: Not as much as one would imagine. My psychiatric training was in biological psychiatry in the treatment of severe mental illness with psychotropic agents. That is what I wrote about, where I did research. To this day I remain professor of psychiatry at Yale and do work with colleagues there on psychiatric interests. But I never had an interest in the reflections of interpersonal relations and I never really thought of myself as particularly competent in interpersonal relations. The only thing that did me any good was training in group therapy. I took great interest in therapy group development. I ran therapy groups out of my practice in New Haven. If you learn something about how groups operate you can manage an organization better. Otherwise you are just flailing about and wondering what you are supposed to do next.
Click here for a PDF of Jarecki's recent lecture on "The Relationship Between Commodity Futures Trading and Physical Commodity Prices."
