Winning a gold medal is the ultimate achievement in sports. If two brothers had succeeded in cornering the silver market in January 1980, “winning the silver” might have meant winning it all instead.
Brothers Bunker and Herbert Hunt created one of the greatest bubbles in the history of financial markets, pushing silver prices from US$6 an ounce in early 1979 to just over US$50 an ounce – its highest price ever – in January 1980. Investors today can learn some important lessons from the saga.
The two brothers were among the richest people in the world in the 1970s. Their father, H.L. Hunt, had been a card-playing gambler but turned into an oil investor. He spent US$30,000 – US$427,000 in today’s dollars – to acquire 5,000 acres (2025 hectares) of untested oil fields in Texas. The East Texas oilfield, as it came to be known, turned out to be the largest pool of oil in the United States outside of Alaska.
Five years after buying the property, Hunt was worth US$100 million, roughly US$1.7 billion in today’s dollars. When he died in 1974, he was one of the richest men in the world.
The Hunt style was to “go all in.” It had paid off many times, and was responsible for H.L.’s fortune. Like a poker player confident in his hand, if Hunt believed in a deal, he didn’t hedge his bets.
H.L. Hunt’s sons inherited their father’s billions, along with his gambler’s instincts, deal-making skills and conservative political opinions. Bunker, in particular, shared his father’s belief that government was the root of all evil.
The book The Big Rich, about four Texas oilmen and the fortunes they made – including H.L Hunt – explains:
“Bunker, like his father, believed the world was slowly falling apart. The Communists, the Jews, the Rockefellers, the Russians, the Chinese, the hippies – everyone was out to destroy the world and Bunker’s position in it.”
The Hunts suspected that forces (especially the U.S. government) were conspiring to steal their wealth. This anti-government viewpoint, combined with their gamblers inclination for “going all in,” drove the Hunt brothers’ fixation with the silver market.
With the inflation rate in the United States in 1974 at nearly 14 percent, Bunker and Herbert saw inflation eating away at their fortune. They blamed the government for printing too much paper currency. They feared that a collapse of the U.S. dollar was inevitable. The only alternative, in their minds, was converting dollars to tangible assets like gold and silver.
However, due to a law passed forty years earlier, private U.S. citizens at the time weren’t permitted to buy gold. So the Hunts set their sights on silver.
So in early 1974, the brothers accumulated futures contracts totaling 55 million ounces, or about 9 percent of all the silver then in the world. The futures contracts gave the brothers the right to buy silver at agreed-upon prices on an agreed-upon date in the future.
Typically, commodity futures traders sell their contracts before the agreed upon date rather than “take delivery” of the actual commodity. It would be a huge logistical feat to accept delivery of 55 million ounces of silver.
But that’s exactly what the brothers did – they took possession of the silver instead of just selling the contracts. Bunker Hunt was worried the U.S. government might confiscate his silver, like it had done with gold in 1933. Also, he could not bring the silver into Texas without paying a 5 percent state tax. So the Hunts chartered jets to fly their silver, under armed guard in the middle of the night, to Switzerland for safekeeping.
The Hunts’ silver holdings stayed the same for five years. Then, in mid-1979, the brothers, along with Saudi partners possibly working for the Saudi royal family, purchased over 43 million ounces of silver contracts on U.S. exchanges, with delivery to be taken that fall.
As the delivery date approached, the price of silver doubled from US$8 per ounce to US$16 per ounce in eight weeks. As word of the Hunts’ position spread, other big traders also started buying silver.
The commodity exchanges that traded silver were in a panic. They held only 120 million ounces of physical silver – more than enough to cover physical deliveries under normal circumstances. However, that amount was traded in October alone.
If silver futures contracts buyers wanted to take delivery of more physical silver than the exchanges had, the exchanges would be “squeezed” – forced to buy silver on the open market, which would push the price of silver even higher.
So, late in 1979, the commodity exchanges changed the rules and stated that no investor could hold over 3 million ounces of silver contracts. It also said that all contracts over 3 million ounces per trader must be sold by February 1980.
The Hunts, who didn’t trust the government and regulators, accused exchange officials of having short positions, so that they would profit when silver prices fell. The Hunts believed the exchanges were betting against them. (It turns out that this was at least partially true.) That was because if the Hunts had to sell all their silver contracts, silver prices would fall.
Sensing that there was now a shortage of silver, the Hunts pushed even more of their chips onto the table. Bunker placed futures orders to buy another 32 million ounces of silver at a cost of more than US$500 million. One Commodity Futures Trading Commission (CFTC) official privately estimated that the Hunts and their Saudi allies then controlled 77 percent of all silver in private hands.
Prices surged, crossing US$40 per share, then on January 17, 1980, silver hit US$50.50. The Hunts’ holdings were valued at US$4.5 billion, nearly US$3.5 billion of which was profit (that’s US$10 billion in today’s dollars.)
It was the highest silver prices, and their fortune, would climb.
Check tomorrow’s Asian Wealth Daily to find out how the Hunts’ scheme ended and what investors can learn from this incredible story.
This is what happens when you try to corner the market
Here’s how the saga ended.
On January 21, 1980, the commodity exchanges, with support from the U.S. government, announced that no one could buy anymore silver. Investors could only sell silver – and only sales to exchange-approved buyers were allowed.
The exchanges had changed the rules, and there was nothing the Hunts could do about it. They couldn’t buy more silver. And if they sold their massive holdings, they risked triggering a panic.
On January 22, the price of silver plummeted to US$34. The Hunts desperately looked for ways to prop up silver’s price. However, on March 14, 1980, their time ran out. The rules changed yet again.
Paul Volcker, then chairman of the U.S. Fed, in a move to control rising inflation, ordered U.S. banks to begin curtailing their loans. Loans for “speculative holdings of commodities or precious metals” were singled out – likely with the Hunts as specific targets, since they borrowed money to buy their silver contracts. American banks and brokerages would no longer lend money to the Hunts.
On March 26, 1980, the Hunts had a US$135 million margin call (margin calls explained here) and couldn’t pay it. The Hunts were told their broker would begin selling their silver bullion to satisfy it. This caused the bottom to fall out of the price of silver. It closed at US$15.80. The next day it traded under US$11 an ounce, down 78 percent from its high 10 weeks earlier.
U.S. government officials bailed out the Hunts’ brokerage firm, Bache, to avert what could have been a national financial disaster. Bunker and Herbert Hunt were eventually convicted of manipulation, fined, and forced into bankruptcy. It took them over ten years to make things right with their creditors.
Bunker Hunt died in 2014 – once again a billionaire, thanks to oil holdings he managed to keep. His brother Herbert is 87 years old and reportedly has a net worth of US$2 billion.
Bunker Hunt has always denied that he intended to corner the silver market. When his wife demanded answers after the silver fiasco, he famously replied, “I was just trying to make some money.”
The saga of the Hunt brothers and their attempt to corner the silver market offers lessons for all investors and speculators – whether large or small.
- Cornering the market is a myth. For one thing, few investors have enough capital to corner a market. And virtually all attempts to corner a commodity market have failed. Prices may temporarily increase sharply as a speculator ramps up buying, but the trader eventually has to sell to make any money. And when he sells, prices can fall quickly when the market realizes that the buying rampage is over. So the profits of cornering a market would be elusive.
- Leverage (borrowing) kills. Had the Hunt brothers stuck with just buying silver bullion, they would have survived, and maybe even come out ahead. But their use of leveraged commodity contracts, where they borrowed money to invest, was their downfall. Leverage can earn you higher returns when prices are going up, but they magnify the losses from falling prices.
- Overconfidence trips up even the best. The Hunt family had experienced a long series of spectacular investment successes. They were fortunate – some might say lucky. Their judgment was clouded by their own sense of invulnerability.
- Have an exit plan. For billionaires, the Hunts were remarkably “seat of the pants” speculators. In hindsight, it seems obvious that their massive accumulation of silver would not end well – and that they hadn’t thought their plan through.
- House rules may change. All gamblers are subject to the house rules. And traders – even though most aren’t gamblers – should know that the stock exchange will change the rules to protect itself if it feels threatened. (China’s stock market authorities are particularly adept at this.)
- Politics and trading don’t mix. An investor needs to be objective when making decisions. Confirmation bias – the tendency to ignore information that might contradict our beliefs – is an investor’s worst enemy. Based on a deep-seated anti-government worldview, the Hunt Brothers believed the collapse of the dollar was imminent. They staked their fortune on this belief.
Over 35 years later the U.S. dollar still hasn’t collapsed – though some always think its demise is imminent. Meanwhile, in nominal terms (that is, without accounting for inflation), the price of silver is about where it was when the Hunts began buying.