Enter the Hunt brothers

His children had inherited some of his quirks including risk taking and gambling instincts.

Nelson Bunker Hunt was the most famous (or notorious, depending your viewpoint) of the Hunt brothers. The Hunt family was among the wealthiest Americans by 1960s riding on their success in oil and commodities business.

High inflation

The 1970s were not kind to the US economy and the US dollar. Inflation was rearing its ugly head throughout the late 1960s and early 1970s. As if this was not enough, war broke out in the Middle East in October 1973. The oil producing countries declared an oil embargo against the United States. Inflation jumped above 10%. It remained high throughout the decade, peaking at an annual average of 13.5% in 1980.

The world was operating on the Gold standard – pegging the currency rates to the value of gold. For years, the US dollar was pegged at $35 for an ounce of gold. High inflation of the early 1970s required the US Government to abolish the gold standard allowing the US dollar to float freely. The government could print currency irrespective of the gold reserves.

The silver horde

The commodity traders do not like such a situation as this can increase inflation. They perceived that precious metals offered a safe haven. Since it was illegal to trade gold, the Hunt brothers turned to silver.

The Hunt family, led by Bunker, owned roughly two-thirds of all privately held silver on earth and controlled 69% of all silver future contracts on the COMEX in New York.

Price moves

The spot price of silver was around $6 per ounce in early 1979. By January 1980, it shot up to above $50. The Hunts were getting richer with every uptick on silver price. They were making more than $100 million dollars on their position in silver contracts, but instead of squaring off the transaction, the Hunts decide to take delivery. This resulted in short supply of silver for industrial usage. Costs went through the roof for companies like Kodak that needed silver for the photographic films. Some smaller companies had to lay off workers. Jewelry makers Tiffany & Co. brought out a full-page ad in newspapers slamming the Hunt Brothers.

With the high silver prices, people brought out their silver to the market just to cash in on this boom. This was a sudden and unexpected supply.

The industrialists and others complained about cornering of silver market by the Hunt Brothers to the exchanges and they started putting restrictions on the positions that could be taken. This was the undoing of the entire cornering of the silver market. The silver prices dropped. The banks from which the Hunts had borrowed to buy silver, called for margin money. When the Hunt brothers could not pay the margin money, the banks started selling the metal. This started the downward spiral.

By end of March, silver was trading below $11 an ounce. The Hunt Brothers did not have enough money to buy the metal that was thrown at them.

End of the story

In 1988, Bunker filed for bankruptcy. Thus came the end of a “rags to riches to rags” story.

This event happened decades ago, but the jury is still out on whether this was a financial manipulation. While many view the Hunt brothers as white-collar crooks, others see them as the victims of overstepping regulators and vindictive insiders. It is believed that some in the government and the regulatory agencies were short on the metal. The only way to stop the Hunts was through regulatory restrictions. The Hunt brothers were painted as villains.

This story just goes to show how difficult it can be to distinguish illegal market manipulation from the normal working of the markets.

–          Amit Trivedi

This article was originally published in the September 2016 issue of Horizon magazine of JM Financial Services.