How to make, and lose, billions of dollars in silver

Kim Iskyan from Truewealth Publishing, tells us of the promise (and pitfalls) of investing in silver…

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 Truewealth Asian Investment Daily to find out how the Hunts’ scheme ended and what investors can learn from this incredible story.

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