At one point Herbert Bunker Hunt and his younger brother Nelson, as well as other members of the Hunt clan owned around two-thirds of all the privately held silver on the planet.
According to their subsequent legal defense the vast stockpile wasn’t a ploy to manipulate the price of silver higher only for them to ultimately cash in. Instead, their motive – according to their defense at least – was to hedge against the surge in inflation of the 1970’s and the debasement of the US dollar.
Older brother Bunker (who went by his middle name) was the richest man in the world in the 1960’s; his father having made a fortune drilling for oil in Texas. But at the beginning of the 1970’s the brothers began to worry that all was not well with the US economy.
A number of domino’s were to fall. First, the 1960’s was characterised by huge levels of government spending to service the Vietnam War. Second, in 1971 the US under Nixon abandoned the US dollar link to gold (pegged at $35 per once since the first Roosevelt administration). Third, war broke out in the Middle East in 1973 and an oil embargo was declared against the United States. Inflation jumped above 10% and would eventually peak in 1980 at 13.5% in the aftermath of the Iranian Revolution.
As inflation began to rise they started to worry that their wealth was beginning to melt away like an ice cube on a hot day in summer. But in the early 1970’s it was illegal to trade gold, and so the brothers looked at the next best thing to hedge that risk – silver.
In 1973 the brothers acquired 35 million ounces of silver, flying the metal to Switzerland in specially designed planes. At the start of the year the price of silver was a little per $2 per ounce. Early the following year the price had tripled as the Hunt brothers stockpile resulted in a shortage. Over the next five year the silver price did…nothing. All told it had been an expensive bet. High storage costs with precious little profit to show for it.
And then in the autumn of 1979 the Hunt’s – perhaps impatient for a return – were back with a vengeance. By the end of the year their stockpile of physical silver had swelled to 42 million ounces, but this time they had even larger positions in the futures market. Together the Hunt clan had over 65 million ounces of silver futures. Unlike every other investor they took physical delivery of the silver when the contracts expired, flying the metal to their Swiss vault and in turn creating an even larger shortage.
This time the price of silver went parabolic. From just $6 per ounce in early 1979, prices rose more than eight-fold to a high of $50.42 per ounce twelve months later. At the time the Hunt’s controlled over two-thirds of all silver contracts on the New York commodity exchange (COMEX).
Silver may have been the next best alternative to gold, but it also comes with some significant characteristics that would mean it wouldn’t perform quite how the Hunt clan intended. Back in the 1970’s silver was increasingly being used in photography. Then, as now silver was both a precious metal, and an industrial metal.
As more and more people became aware of the high silver prices extra supplies suddenly began to appear. Silver jewelry, coins with silver content, anything with a scrap of silver was melted down to capitalise on the surge in prices. Thieves also suddenly took an interest – often a sign that a peak is close by – with the police in the US warning households of pilferers with a renewed penchant for shiny metal.
The Hunt’s had succeeded in engineering a boom in the price of silver. But in order to achieve that they had to spend $6.6 billion, of which only $1 billion was their own money. The rest was borrowed from over 20 banks and brokerage houses. But as supply gradually rose and more and more kept on being delivered to their Swiss vault, the brothers ran out of the means to pay for it.
The commodity exchange COMEX, recognising the potential for the market to collapse introduced tighter restrictions on the issue of new futures contracts. Predictably this led to margin calls being issued as banks began to fear for their money. But the Hunt’s were in a sticky position. Unable to sell their position they decided to borrow even more in an effort to try and prop up the market.
By the end of March things were starting to come to a head. The Hunt’s largest backer had been unable to secure any collateral from the brothers and so began offloading their silver. By 27th March, “Silver Thursday” the price of silver dropped to $10.80 per ounce.
Whether they were guilty of manipulation or not the brothers made some fundamental errors. Fundamentally they forgot to take account of the actions of other players in the market. First, they never appeared to realise that by holding such a large position in the futures market they would be left with no one to sell to. Second, they didn’t pay enough attention to the stock-flow characteristics of the silver market.
Silver is similar to gold but its a poor substitute to its illustrious precious metal cousin when it comes to hedging against a currency debasement. Divide the stock of gold (the amount ever mined) by the flow (the annual production) and you get a ratio of 66 years. Silver meanwhile has a much lower stock-to-flow ratio of ~22. As prices rise supply will come onto the market – as the Hunt’s discovered to their cost.
Whether they were guilty of ‘cornering’ the silver market remains an open question. Irrespective of whether they had malicious intent the whole episode has some important lessons for investors. Forty years later the global economy is facing a similar position – vast government and private sector debts and a loss of confidence in fiat currencies. The ‘war’ on covid-19 has – and will continue to mean those debts escalate further. A ‘hard asset’ that cannot be debased by increased supply is the only thing that will hold its value in that environment. It pays to think about the stock-to-flow.
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