Silver? Looking Good, Billie-Ray

How Silver Rule 7 hit the Hunt Brothers' silver corner...

In JUNE 1983, Paramount Studios released a comedy starring Dan Akyroyd and Eddie Murphy which culminates in an attempt by two wealthy commodity brokers to corner the market in frozen concentrated orange juice futures, of all things, writes Tim Price at Price Value Partners.

The film was called 'Trading Places' and this correspondent has previously described it as "symbolic of a more innocent age (specifically 1983) when interference in innocent people's lives by gambling financiers was the exception rather than the rule".

It was a hit, securing a solid IMDB rating of 7.5. The tag line? "They're not just getting rich...They're getting even."

This was a peculiarly commercial example of Art imitating Life. Three years earlier, Bunker and Herbert Hunt, Texan heirs to an oil fortune, had attempted to corner the market in silver. CMI Gold & Silver takes up the story:

"Bunker, the older of the two brothers, distrusted paper money, believing that runaway inflation and economic instability would devalue the Dollar shortly.

"In 1973, when silver sold for around $2 an ounce, the Hunts secretly started accumulating as much precious metal as they could. For them, silver was a more secure wealth repository than bank money. Bunker even had apocalyptic anxieties based on his religious beliefs that paper money would eventually be useless during a worldwide calamity. A vault containing silver bullion would be the best insurance policy if that day arrives.

"In 1974, their father passed away, leaving the brothers a new source of capital (his wealth was estimated at $2–5 billion). Empowered by their immense wealth, the Hunts redoubled their efforts to corner silver. During the late 1970s, they continued buying, expanding their strategy beyond bullion bars and coins to invest heavily in silver futures contracts. Notably, they decided not to play by the traditional commodity-trading rules; rather than closing their futures trades for cash, the Hunts insisted upon the physical delivery of each bullion bar they had contracted for..

"They warehoused the metal in storage facilities and Swiss bank vaults, pulling a constant supply of silver off the open market. Every delivery reduced the supply for all others, pushing prices upward. By 1979, this hoarding tactic had ballooned into a blatant effort to corner the world's silver market. Their buying was almost incomprehensible in its scope. The Hunts and their investors, said to include some wealthy Saudis, had accumulated about 200 million ounces of silver by 1979, representing about one-third of the world's total supply of tradable silver..

"Silver was trading at about $6 an ounce in early 1979; in January 1980, it would reach an all-time high of $48.70. At that height, the Hunts' stash was worth an estimated $10 billion on paper. The mania spread well beyond Wall Street. With prices soaring, everyday Americans began rummaging for any silver they could unload. Families dug up heirloom silverware and antique tea sets to be melted down for cash. Thieves started breaking into homes to steal sterling candlesticks and flatware. Even physicians felt the pinch as the price of X-ray film, which was silver-coated, soared.

"The hysteria reached such absurd proportions that Tiffany & Co., the famous New York jeweller, took a full-page newspaper ad condemning the Hunts. 'We believe it is unconscionable for anyone to accumulate several billion, yes billion, Dollars' worth of silver and thereby bid the price up so high that others have to pay artificially high prices for silver articles,' the ad staunchly asserted. The Hunt brothers' personal crusade was twisting the price of everything from medical equipment to forks to jewellery, and individuals were beginning to get upset.

"For a while, the Hunts seemed to have staged one of the greatest market plays in history. But their position was as risky as it was massive. By early 1980, the brothers had borrowed massively to continue purchasing more silver. Their empire was built on a shaky base of margin loans – funds borrowed by brokers and banks hungry to profit from the silver boom. The Hunts' great influence had also drawn the attention of market regulators and the US government.

"In January 1980, as the silver frenzy was nearing its peak, the Commodity Exchange (Comex) in New York acted forcefully. The exchange introduced 'Silver Rule 7', which suddenly restricted the rules on speculative silver trades, essentially banning most new silver purchases on margin. The Hunts suddenly could not use any more leverage; if they wanted to buy more silver, they would have to put up 100% cash in advance. No more borrowing to magnify their bets.

"At the same time, Federal Reserve Chairman Paul Volcker quietly encouraged banks to stop lending to anyone speculating in precious metals. The signal was clear: the Hunts' silver binge had to be stopped.

"Abruptly denied the easy credit and leverage that had fuelled their buying, the Hunts grew increasingly isolated. The demand side of the silver equation – which they had so wildly expanded – started to shrink. Then the unavoidable occurred: gravity took hold. Silver prices began slipping after reaching a peak near $50 an ounce in January. Initially, the drop was slow, but as soon as news got around that the party may end, other investors started scurrying for the exits. The Hunts attempted to prop up the price, but with no new buyers, their effort was akin to trying to stem the tide.

"In late March 1980, the bottom fell out. On Silver Thursday, with silver's price plummeting, the Hunts were deluged with a barrage of margin calls – requests from their brokers for additional cash to secure the loans that had financed their trades. They could not pay. Within a period of one day, the Hunt fortune disintegrated. Approximately a $7 billion paper profit became a $1.7 billion loss. The price of silver, which the brothers had pushed to unprecedented levels, tumbled back to around $10 an ounce. Nelson Bunker Hunt tried to keep up an appearance of courage, even while he watched the gradual crumbling of his empire. 'A billion Dollars isn't what it used to be,' he said with wry humour."

Although the current silver market environment would seem to suggest that the story of the Hunt Brothers – wild bull market followed by calamitous crash – is playing out all over again, there are some key distinctions this time around:

The silver market is not experiencing a speculative ramp by a handful of reckless gamblers; rather, the relentless bid for silver primarily reflects increasingly desperate real world demand by industrial users for an essential, highly conductive, metal that has been in physical deficit for the last five years.

The US, via Comex, now controls a much smaller share of the global silver market compared to 1980. Any number of attempts to invoke relatives of Silver Rule 7 are destined to carry less weight today. The overall market is now far bigger, more international, and has shifted towards physical and industrial drivers as opposed to speculative and derivative ones. In short, the US no longer calls the shots.

Monetary systems tend to last for roughly thirty years or so. What passes for our global monetary system – an inherently inflationist fiat shambles ushered in by Nixon's 'Gold Shock' of 1971, removing the Dollar's convertibility to gold – is now experiencing significant signs of decrepitude under the weight of unsustainable government debts.

Economic and market commentator James Grant makes the following observations about money, credit and debt:

"To begin with, a pair of definitions: Credit is the promise to pay money, ie, debt. Money is that contrivance which discharges debt.

"Money is a very long story. From the founding of the Republic until 1971, gold and/or silver were money. Value was intrinsic in them. A Dollar was defined as a certain number of grains of fine gold – 25.8 grains under the Gold Standard Act of 1900. Paper Dollars were exchangeable into gold and derived their value from gold.

"The age of paper money dawned in 1971. To the post-1971 Dollar, value is imparted, not intrinsic. It is imparted by the words that the Bureau of Engraving and Printing stamps on the face of each unit of green currency: 'This note is legal tender for all debts, public and private.'

"The thoughtful reader pauses at the word 'note'. A note is a credit instrument, a promise to pay. Yet, under law, Federal Reserve notes are money. What is the nature of this promise? The truth is that it is no promise at all, but an artifact from the era of convertibility. Until 1933, $20.67 could be converted into, or redeemed for, one ounce of gold. The Dollar was said to be anchored by gold. As there was only so much metal, there could only be so many Dollars. The late John Exter, banker and monetary thinker, acidly described the modern-day Federal Reserve note as an 'IOU nothing'."

The international monetary and currency system seems to be fragmenting. The US administration appears to favour some kind of crypto/paper mongrel shell game involving stablecoin and US Treasury debt. The BRICS confederation appears to favour a currency system at least in part backed by tangible assets. Where this leaves private commercial banks playing highly leveraged paper games is anybody's guess. But the word 'cornered' springs to mind.