Inflation erodes the buying power of money and consequently the real value of income producing investments. In the 1970s, rates of inflation rose precipitously around the world. This reduced not just the value of money and long maturity fixed-income securities but even hurt economic performance and an array of other financial assets, including stocks, which used to be considered an inflation hedge. In response to the changing investment landscape, many used commodities as an alternative store of wealth, particularly the precious metals. In the United States, one family went ‘all-in’ on silver during the peak of that inflationary era. They did so, at least according to many, with the intention of cornering the silver market, a scheme that lost them and their lenders billions when prices collapsed on Thursday, March 27, 1980.

Inflation

           Rising inflation and its effect on the precious metals market is the backdrop to the story of ‘Silver Thursday’. In the early-to-mid-1970s, growing government spending, loose monetary policy, and supply shocks in oil markets caused high inflation to persist through the decade. Perhaps most relevant to both inflation and the precious metals market was the end of convertibility of the US dollar to gold in 1971. The so-called Nixon Shock, among other things, ended the use of the gold standard and allowed the dollar to float freely among other currencies. More precisely, the dollar did not float so much as sink, depreciating slightly against other currencies and sharply against gold and silver, whose value tripled in the early 1970s.

           For Americans, it was silver, not gold, that served as the most effective alternative store of wealth because it was still illegal for private individuals to own or trade gold through the end of 1974. Executive Order 6102 and the Gold Reserve Act of 1934, which banned sizable private holdings of gold in the US was not repealed with the end of the gold standard. Thus, silver became the metal of choice for those betting against the dollar.

The Hunt Brothers

            At the center of Silver Thursday were two brothers, Nelson Bunker Hunt and William Herbert Hunt. They were billionaire oil tycoons whose father had traded his gambling winnings for both oil producing property and untested oilfields in Southern Arkansas and East Texas. If their all-in bet on silver was any indication, the gambling gene lived on in the Hunt brothers. The pair were known for their ultra-libertarian politics and were even members of the John Birch Society. The family was rumored to be the inspiration for the Ewing family in the 1980s TV series Dallas. It hardly sounds farfetched; the show’s leading character, J. R. Ewing, was a megalomaniacal, scheming, and perhaps less-than-ethical Texas oil magnate much like the Hunt brothers.

           However, the Hunt brothers had their wealth tied up in more than just oil. Bunker and Herbert Hunt also speculated in other commodities from soybeans to sugar beets, all before their forays into the silver market. Indeed, the two already had a record of market manipulation after being accused of attempting to corner the soybean market in 1977. This after they had bought up the rights to one-third of the American autumn soybean harvest. Cornering a market consists of purchasing sufficient quantity of a security or commodity so as to control its price. From there, that accumulated supply could be doled out at high prices. 

Leverage   

           The brothers’ foray into silver began years before Silver Thursday; in 1973, they had already bought over 35 million ounces of silver and then continued to buy in mammoth quantities in 1979. By the end of that year, the two brothers together owned over 40 million ounces of physical silver and they were long on 65 million ounces in silver futures. Even such large private holdings of physical silver alone were rare; most traders settled their futures contacts in cash, never opting to take physical delivery. Not only did the brothers take delivery, but to avoid a Texas sales tax, they shipped their silver to Switzerland on three chartered 707 aircraft. The pair, famous for their radical libertarian views, feared the US government would confiscate their silver. It turned out it was their bankers they should have feared.

           Bunker and Herbert Hunt’s insatiable appetite for silver drove the price much higher. Amid their buying, the price of silver surged from about $6 per troy ounce in early 1979 to over $50 a year later. If cornering the market was really their aim (naturally, they would later deny it was), they needed to own the overwhelming majority of the silver in private hands in order to control the price. They came close to achieving this; the Hunt brothers owned about two-thirds of the privately held supply of silver. Some estimate their holdings, along with those of their closest partners, may have peaked at as much as 77% of the world’s private holdings of silver.

           Of course, buying all this silver is an expensive proposition. As such, the vast majority of the brothers’ $6 billion in silver holdings were financed on borrowed money. The billions in debt financing came from over twenty lenders, ranging from American banks and brokerage firms to Saudi sheiks. Margin loans were the fuel that fed their scheme. That men who were already billionaires would take on such risk is stupefying. However, that money was also a tool to obtain further riches, not merely something to defend. The family’s great wealth tied to non-financial assets meant they had access to borrowed money at rates not available to other speculators.

Bust

           Cornering the market in precious metals, especially silver, is problematic because much of the potential supply is held by individuals that would normally not be interested sellers. However, that could change if prices rise high enough, as they did in 1979 when silver hit $30 an ounce after starting the year at under $7. Indeed, as prices rose in 1979 to unprecedented levels, new silver supply emerged as people scoured their homes for silver in coins, dishes, and jewelry. Many people were selling any silver they owned for quick cash. Newspapers even reported home burglars were increasingly paying special attention for any silver they can make off with. In America, businesses specializing in buying peoples’ silver were popping up across the country.

           Further, just as prices were peaking in early 1980, other speculators began selling on disbelief that prices so high were sustainable. Silver, although a precious metal, has several industrial uses, and demand was being crimped by the astronomical prices and weakening global economy. After the supply and demand dynamics began to change, it was clear the Hunt brothers lacked the financial resources to soak up all this extra selling. They had failed to corner the market and prices began to fall.

           The actions of regulators and exchanges also served to accelerate the bust. Commodity exchanges cracked down on the manipulation by placing new restrictions on trades in silver. New York’s COMEX limited the size of permitted exposures to the metal and implemented tighter margin requirements. The Chicago Board of Trade even halted trading of new silver futures contracts altogether. The Federal Reserve had also taken action to quell the very inflation that had encouraged the Hunt brothers’ initial interest in silver. They raised the Fed Funds Rate from 13.75% at the start of 1980 to 17.50% by that April and put regulatory pressure on banks to curtail risky loans. Loans to commodity and precious metal speculators were singled out specifically.

           Even the luxury jeweler Tiffany tried to check the actions of the speculators. They put out an advertisement on page A3 of The New York Times calling it “unconscionable” that speculators would manipulate the price of the metal, making silver jewelry more expensive. However, that newspaper ad came out in March 1980; by then, prices were already sliding from their nearly $50 peak. It did however herald Silver Thursday; the very next day, prices halved. On Thursday, March 27, 1980, silver prices fell 50% to under $11 per ounce. It was not so much Tiffany that brought about the bust as the realization that the Hunt brothers were unable to meet their bankers’ demands for more collateral as the market moved against them. Unable to meet the margin call, banks took the collateral and began selling off the brothers’ silver holdings.

           The saga did not end on Silver Thursday, but continued with lawsuits through the 1980s, finally ending with Bunker and Herbert Hunt declaring bankruptcy in 1988. Their legal team argued that the mammoth purchases of silver were an investment, not an attempt to corner the market; the brothers’ folksiness and political opinions won them some defenders. Whatever the motivation though, the devaluation of billions of dollars in silver holdings had a not-insignificant effect on their lenders. It brought about the near collapse of the brokerage firm Bache & Co., which the brothers had borrowed from to finance their purchases. A consortium of banks extended a $1.1 billion line of credit to allow for a more orderly liquidation. With that, yet another ethically dubious scheme for quick riches came to an end.

Lesson   

           Silver Thursday was an astounding affair given the sums of money involved and the suspicious intent, to say the least, of the schemers. Whether innocent investors or conniving manipulators, Bunker and Herbert Hunt were certainly curious personalities; it was truly a case of Dallas meets Wall Street. Silver Thursday also fittingly marks the end of an era and the beginning of another. The beginning of the end for the decade of inflation and otherwise sleepy financial markets and the start of one filled with financial excess. The sums involved in the Hunt brothers’ scheme would have seemed monumental for the time but its failure did not dent the appetite for debt financed speculation in the decade ahead.

Further Reading

1.     Beattie, Andrew. “Silver Thursday: How Two Wealthy Traders Cornered The Market.” Investopedia, 8 July 2009.

2.     Christopher, Ben. “How the Hunt Brothers Cornered the Silver Market and Then Lost It All.” Priceonomics, 4 Aug. 2016.

3.     Iskyan, Kim. “Here’s the Story of How the Hunt Brothers Tried to Corner the Silver Market.” Business Insider, 17 May 2016.

4.     Ivry, Bob. “Hunt Brothers’ Silver Stockpile the Last of Its Kind.” The Seattle Times, 8 Nov. 2014.

5.     Kennedy, J. Michael. “Hunts Guilty of Scheme to Corner Silver : Texans Ordered to Pay $130 Million to Firm in Fraud Convictions.” Los Angeles Times, 21 Aug. 1988.

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