Last night I lay back on my couch and had a couple of glasses of red, while reading an article from 1980 about the Hunt brothers and the events that surrounded the last spike in Silver to $50.
I found the article while surfing the web for financial news so I take no responsibility for the fact the original article was found in Playboy. Everyone reads Playboy for the articles, right?
It was a fascinating article and well worth the read for anyone interested in the markets. You can find the article here.
A short synopsis of the story is that the Hunt brothers, and in particular, Nelson Bunker Hunt, bought so much silver in the mid to late 70s that they nearly cornered the market.
They bought 55 million ounces in late 1973 and early 1974 at around $3-$4 an ounce and sent 40 million ounces of it by chartered plane to Switzerland because they feared the US government would confiscate silver in the same way it had stolen gold from US citizens in the 1930s.
The rationale for their buying made perfect sense. Nixon had taken the dollar off the gold standard, so it was now a purely fiat currency. The Hunts feared that their wealth was going to be stolen by the printing presses and they wanted to protect their immense inheritance (their father made billions in oil).
They continued buying over the ensuing years and even went into partnership with some Saudi Sheiks. They set up a Bermuda-based trading company called International Metals Investment Company Ltd. The firm listed four principals: Nelson Bunker Hunt, William Herbert Hunt, Sheik Mohammed Aboud Al-Amoudi and Sheik Ali Bin Mussalem. Rumours were that they were also backed by some very wealthy Sheiks who didnt want to be named.
This firm was incorporated in the summer of 1979 just prior to the immense spike in silver. They bought 90 million ounces of silver through the partnership and also wanted to take delivery of the silver. Over the next few months, the silver price spiked sharply (from $8 to $16 during August and September 1979) and there were fears of a squeeze on silver supplies. The commodity exchanges were worried that they would not be able to make delivery of contracts in silver bullion when they came due.
This is where it gets really interesting. And we can see some parallels to the current price action in silver
As stated in the article, The boards of both the Chicago and the New York exchanges were composed not only of outside directors but also of representatives of the major, usually Eastern-based brokerage houses. Later testimony would reveal that nine of the 23 Comex board members held short contracts on 38,000,000 ounces of silver. With their 1.88 billion dollar collective interest in having the price go down, it is easy to see why Bunker did not view them as objective regulators.
As the price of silver continued to climb the regulators began changing the rules. First the Chicago Board of Trade (CBOT) raised the margin requirement and declared that silver traders would be limited to 3 million ounces of futures contracts. Traders with more than that would have to divest themselves of their excess futures holdings by mid-February 1980.
The price of silver really started to shoot to the sky now because there was a perceived silver shortage. By the end of 1979 the price stood at $34.45.
On January 7, 1980 the Comex changed the rules. The exchange announced new position limits for futures contracts of 10 million ounces. The effective date for the limits was February 18, 1980. After this announcement, the price climbed higher and the Hunts kept buying. On January 17 silver hit $50 an ounce.
On January 21, the Comex announced its coup de grace, saying that trading would be limited to liquidation orders only. No, Im not kidding. The exchange changed the rules so that no one was allowed to open any new positions from that point on. You could only liquidate open positions. The next day silver fell off a cliff and plunged from $44 to $34.
To cut a long story short the price kept falling and the Hunts couldnt cover their margins on the futures they had bought. The Fed stepped in for fear that a huge financial panic was about to ensue and lent $1.1 billion to the Hunts to cover their margins but demanded huge collateral for the loans.
Nelson Bunker Hunt eventually went bankrupt in 1988.
Fast-forward 30 years and the silver price has once again scaled the heights to $50 an ounce. The exchanges changed the rules to increase the margin requirements and the price of silver has plunged 27% in a week. There are rumours that JP Morgan holds an immense short position in silver that was feeling the pinch.
What better way for them to relieve the pressure than to turn the screws on the long positions by raising the margin requirements substantially and then pick up the pieces at their leisure?
After reading the history of the Hunt brothers and seeing that the futures exchanges change the rules of the game after the fact, you have to view the current price action in silver with a little more skepticism.
In 1980, the fall was due to the exchanges desire to hurt a big player who was long. Todays move I believe is more about protecting the position of an insider who is short and hurting.
Therefore, I think you would have to say that chances are high that the price of silver will once again scale the heights if the players who are short use this sell off to cover their short positions. There is still a lot of pent up demand for precious metals and central banks continue to print.
I would not be surprised to see silver flat line for a few months during this seasonally weak period for metals and after taking such a hammering, but there will be a time in the next few months when silver will be a bargain.
Reprinted with permission from The Daily Reckoning.
Murray Dawes heads up the technical analysis desk for the Australian Daily Reckoning.