Dark lining to a silver cloud: The market is wondering why so much bullion was sold so fast, and whether there is more to come

THEY did not know what had hit them until it was almost over. Shortly after 9am London time on a grey Tuesday last week, dealers in the trading rooms of Europe's broking and bullion houses woke up to the fact they had been on the receiving end of a massive sell-off of 620 tonnes of silver.

As reality dawned the panic buttons were pressed from Zurich to London and the price plummeted as traders competed to offload their rapidly depreciating purchases on to longer-term investors.

'Dealers in the market had become blase about it not moving,' one market maker observed. 'By the time they realised this was too big to handle there were no parachutes and they were in freefall.'

Events had been put in motion a short while earlier when the only private bank in Saudi Arabia, the Jeddah-based National Commercial Bank, had put out feelers to some of the big players in the precious metals markets.

Would they, it inquired, like to buy a million or so ounces of silver at just under dollars 4 an ounce?

That is a sizeable purchase in a business where 100,000 ounces - 'troy ounces' are the traditional way of measuring silver - is a more normal amount to trade. But the silver price has been low of late and the offer was tempting.

What the bank did not tell the wheelers and dealers was that it would be trying to tie up at least 20 more such deals - the equivalent of about 5 per cent of the world's annual demand. Indeed some rumours later said it was twice as much, though the NCB denied it.

Had they realised so much was in play they would have been wary. But the silver market is a secretive world where no one can ever be sure what deals are being done.

The exception is New York, where silver traders ostentatiously buy and sell in a pit at prices visible to curious eyes. But elsewhere trading in the precious metal markets is a private one-to-one affair. The opacity makes it more exciting, volatile, profitable - and treacherous - than playing on more open markets.

On Tuesday, once the shock waves of secondary selling reached the market, the price moved rapidly. Before long it had fallen almost 22 cents to 383 cents an ounce, its lowest level this year. Some of the silver swiftly found a home with long-term investors. US commodity funds looked at their charts and saw only the bottom of a trading range.

But most of the metal had gone initially to half a dozen or so of London's 12 silver market makers, members of the London Bullion Market Association. At the end of the day, about a quarter of it was left on their books, enough to overhang the price for some time.

More worrying to dealers was the motive behind the NCB's sell-off. The Saudi bank had traumatised the markets two years previously by making huge gold disposals, not once but on three separate occasions. The prospect of the same thing happening with silver had the dealers puffing nervously on their cigarettes.

As New York was waking up a possible explanation emerged: Sheikh Khalid bin Mahfouz, the NCB's chief operating officer, had resigned after being indicted the previous week in connection with the collapse of the Bank of Credit and Commerce International.

Traders quickly decided receipts from the silver would come in handy in paying any fines. The view was reinforced by the news that the Federal Reserve had already fined the sheikh dollars 170m in connection with the NCB's role in the BCCI scandal.

Later the NCB was to deny that the sale was connected with the resignation and say it was a 'purely commercial' decision - though it did admit that it had made it on behalf of 'big Saudi clients'. But that did not stop it being the market's favourite rumour.

There were plenty of others, though. Some Middle East sources would have it that the real reason the bank has sold its silver is because of the deportation of up to 1 million Yemenis, a people famous for their love of silver, following the Gulf war. Now they are no longer in Saudi Arabia, the argument goes, demand has fallen and the bank is disposing of excess stocks.

The NCB, which has assets of more than dollars 20bn, is no stranger to controversy, but even for it the past few weeks have been momentous.

Even as Sheikh Khalid was being charged, it was closing down its London banking office. It was an unconnected and purely commercial decision decided months before after disastrous losses from lendings on property, NCB sources said.

But shortly afterwards an order from the US Office of the Comptroller of Currency told NCB to close its New York office within 30 days for violating 'significant provisions' of American banking laws. The largest bank in Saudi Arabia will soon have no offices in New York or London.

Silver has always fascinated Sheikh Khalid. In his father's homeland of the Wadi Hadhramaut, in what is now Yemen, silver, more than gold, is a sign of wealth. Many who work in Saudi Arabia buy silver to take home. Many buy from traders connected to Sheikh Khalid.

His fascination with silver reached its climax 12 years ago when, together with another BCCI-connected Saudi financier, Ghaith Pharaon, he became a central player in the Hunt brothers' multi-million- dollar attempt to corner the world market in silver.

In mid-1979 Sheikh Khalid, along with Saudi princes and businessmen, went into business with the Hunts. Supposedly he wanted the Saudi Arabian Monetary Agency, effectively the country's central bank, to begin using silver as a reserve asset, like gold.

The price went wild, rising from under dollars 5 to over dollars 52 an ounce in four months as the Hunts and their Saudi backers bought up more than 280 million ounces.

In London jewellers played football with Georgian silver teapots, traded in to take advantage of their scrap value. But as the price collapsed in March 1980 the Hunts found it more and more difficult to meet margin calls. They ended up with debts of dollars 1.82bn.

The Saudis, including Sheikh Khalid, Prince Abdullah and other members of the royal family, lost hundreds of millions of dollars. Some commentators said Sheikh Khalid's personal losses were as high as dollars 600m.

Nevertheless, Sheikh Khalid retained the trust of the Saudi royal family. The bank continued to grow, but was limited in its overseas expansion by its lack of a branch network. Sheikh Khalid decided BCCI, and in particular its secret American operation, would make a good vehicle for expansion.

But Sheikh Khalid found he could neither get on with nor penetrate the Pakistani bankers who ran BCCI, and pulled out in 1990, taking with him a profit of dollars 140m. The series of share transactions that also allowed BCCI to cover up the holes in its accounts is the subject of investigation by American and British regulators.

Some have speculated the NCB was finally offloading silver bought in the heady days of early 1980. But Jeff Christian, of CPM Group, the New York-based precious metals consultancy, says that the NCB and Sheikh Khalid were selling silver they had secretly and quietly amassed over the past couple of years.

'The price of silver has been relatively depressed. They believed it would rise again. But silver was Sheikh Khalid's pet project. With him gone the policy went.'

What the markets are most anxious about is whether there are any more disposals to come. Christian says that sale probably represented most of the silver held by the bank. But until 'probably' becomes 'definitely' the bullion dealers will remain nervous of a repeat performance.

(Photographs and graph omitted)