The 1980 silver corner 2 comments

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A corner is a situation where an investor/group of investors secures a large proportion of the outstanding amount of assets on which he forces, or squeezes, those short on the asset to pay a disproportionately high price. Coined in the days of the 19th-century robber barons, it is a vivid description of the quandary faced by shortists who panic to cover: "he that sells what isn't his, must buy it back or go to prison" (courtesy Daniel Drew). The silver corner of the late 1970s-1980 was probably one of the last attemmpted corners.

The protagonists were the Hunt brothers, specifically Nelson Bunker and William Herbert Hunt, two of the fourteen children of the Texas oil magnate H. L. Hunt, who was the richest man in the United States when he died in 1974. Of the two, Nelson Bunker Hunt was the main driving force.

In 1970 Nelson Bunker Hunt decided to invest in silver to hedge against inflation, which was clearly rearing its head. At the same time, silver provided a safe haven to individual investors, in the face of a risky international situation in the forms of Vietnam and the Middle East. The price of silver was then $1.50/oz(ounce). The form of accummulation was via silver contracts which the Hunts had every intention of accepting delivery: by 1974 they had accummulated silver contracts totaling 55 million oz or about 8% of the world's silver supply at that time; they took delivery of all the silver. By the spring of 1974 silver had risen to over $6/oz amid talk of the attempted silver corner.

At this point it is useful to understand the silver market. There are three primary markets for silver: the ornamental market which serves jewelry and silverware; the investor segment which concerns silver bars and coins; and the industrial part which includes photographic film and paper (the main), computer components, brazing alloys, pharmaceuticals and alternative energy applications. The industrial sector generates the biggest demand for silver, while the investor segment, the smallest. Although the world was churning out new silver from the mines all the time, world demand was about double that (new annual production of 245 million oz vs annual demand of 450 million oz in 1974). In that year, of the estimated 700 million ounces of silver in supply, only about 200 million ounces was available for delivery against futures contracts. Supply was tight, and the Hunt brothers realised that if they could take on a partner to resume purchases of silver, the price would rocket upwards, as those short on silver (ie. the sellers of the silver contracts) would have to scramble to find new silver for delivery.

The partner was needed because the Hunts, despite their wealth, were now a little short on cash by then. It also takes a lot of courage to attempt a corner on one's own; better to spread the risk. In 1978 they found their partners in two Saudi sheiks, formed an investment group called International Metal Investment, and resumed their silver contract purchases in 1979 on the CBOT (Chicago Board of Trade) and the COMEX (Commodities Exchange of New York). In the fall of 1979 the silver price doubled from $8 to $16/oz in only two months. Other syndicates with big money behind them started buying silver, as momentum took on a life of its own. The COMEX and the CBOT started to panic; in late 1979 the warehouses of the two exchanges only held 120 million oz of silver. By then, the Hunt brothers held 40 million oz of physical silver in Switzerland and 90 million oz of bullion they jointly owned through International Metals. International Metals had contracts on another 90 million oz due for delivery that March from the COMEX. The Hunts were looking ready to suck all the available deliverable silver out of the US exchanges.

Then the exchanges started to modify the rules of the game. CBOT changed the rules and stated that no investor could hold over 3 million oz of silver contracts and the margin requirement were raised; those holding above 3 million oz. had to liquidate the excess. The market interpreted this move as a sign that a silver shortage was imminent, and pushed up prices to an astronomical $34 by end-1979. Then in January 1980 the other exchange, the COMEX, changed their rules to only allow 10 million oz. of contracts per trader; excess to be liquidated. The Federal Reserve supported the rules modification of the two exchanges. It was analogous to a casino telling the professional gambler that only a certain portion of his chips were now exchangeable for cash. And such an abrupt rules change against a speculator might have inspired Dr Mahathir's moves during the Asian financial crisis to impose capital controls to halt the tide; it makes one wonder what moral authority the West had in criticising the Malaysian PM for his "draconian" measures, when they had set a precedent in 1980.

When the market realised that the financial authorities would resort to drastic measures to stop any silver cornering attempts, the price began to slide. As the Fed kept on raising interest rates (a move to curb overall inflation: see "1970s Bear Market"), it had two effects: it made the US dollar strong and hence silver cheaper (in US$ denomination), and it made credit expensive. The combined effect was to make it difficult to borrow more money against the Hunts' silver holdings (rapidly depreciating in collateral value) to buy even more silver to hold up the price.

By mid-March 1980 silver was down to $21/oz. By end-March the Hunt brothers ran out of cash to top up their margin calls. On March 27th, a day known as Silver Thursday, the price of silver collapsed by 50% from $21 to $11 in one day, as the market realised the Hunts were now being forced to sell their silver. And so started a downward spiral.

The collapse of the silver market meant countless losses for speculators. The Fed eventually came in and got a group of banks to provide a billion-dollar loan to the Hunts, with their oil assets as collateral. Nevertheless, in 1988 Bunker Hunt declared personal bankruptcy, as the family's fortunes declined following the debacle. In 1988 the Hunts were convicted of conspiring to manipulate the market.

The most interesting thing about this episode that emerged in its wake was that members of the two commodities exchanges had just as much at stake as the Hunts, because they were short the futures contracts. If the corner had succeeded, these were the guys that would have been financially killed. Was there a conflict of interest when they formulated the rules changes that eventually killed the Hunts' silver corner? The answer is very clear. Often people take the moral high ground with a secret agenda.

After the Hunt debacle, silver fell into a deep swoon -- falling to about $3.50 in the 1990s. It is interesting that some investors such as Warren Buffett, George Soros and Bill Gates have taken on significant silver positions. They might have seen some undervaluation given the strong utility provided by this precious metal, as described above.

References:
(1) H.L. Hunt's Boys and the Circle K Cowboys
(2) The Hunt Brothers: by Kevin Kerr
(3) The Hunt Brothers and the Silver Bubble: from StockandNews.com