Our Friday Fables blog has been telling you fun tales about precious metals for some time now. These stories are usually legends or myths involving hidden treasure and the like. But today’s post is the true story of the Hunt Brothers and how they tried to corner the silver market, nearly collapsing the country’s financial system.
H.L. Hunt was the type of man to go all in when it came to investing. He used poker winnings to buy a 5,000 acre oil field in Texas for $30,000 (which is about $427,000 today). It turned out to be the largest pool of US oil outside of Alaska. Five years later, Hunt was worth roughly $100 million ($1.7 billion today).
After becoming one of the richest men in the world, Hunt died in 1974. His fifteen children inherited his fortune. Two of his sons, Bunker and Herbert, decided to turn their huge chunk of cash into an ever larger sum. They shared their father’s penchant for gambling, conservative political views, and a belief that the government was evil and conspiracizing to steal their wealth.
Inflation was at a whopping 14 percent in the mid-70s, and the two brothers saw their fortune being eaten away. They feared the viability of fiat money, so they turned to tangible assets. However, private US citizens were not permitted to buy gold at the time. The Hunts settled on silver as their safety net.
In 1973, Bunker and Herbert bought over 35 million ounces of silver collectively. The next year, they accumulated futures contracts for 55 million ounces of silver, which was about nine percent of the world’s silver supply. Futures contracts provide the owner with the right to buy a commodity at an agreed-upon price on an agreed-upon date in the future. Most future traders sell their contracts before the agreed-upon date rather than taking delivery of the actual commodity.
In the case of the Hunt brothers, accepting 55 million ounces of silver would be a logistical nightmare. But they did it anyway. They worried that the government would confiscate the metal because of what happened with gold in 1933. Instead of keeping it at home, they chartered jets to fly the silver to Switzerland under armed guard for safekeeping.
In 1977, the Hunt brothers entered the futures market for soybeans because of rising demand. They ended up purchasing futures for one-third of the entire US soybean supply. Some believed the Hunts were attempting to corner the soybean market, which would create an artificial shortage and drive up prices.The Commodity Futures Trading Commission discovered that a single Texas family had contracted to buy a huge portion of the year’s soybean crop and ordered them to sell and pay a penalty of $500,000. But they had already made tens of millions on paper while soybean prices increased.
In 1979, the brothers turned back to silver, buying over 43 million ounces in contracts with delivery to be taken in the fall. Before the delivery date, the price of silver per ounce doubled from $8 to $16 in just eight weeks. Other traders started buying as well, sending commodity exchanges that traded silver into a panic. More silver was being traded on paper than there was physical silver to cover deliveries. This also led to problems with companies that made industrial use of the white metal. Later that year, the exchanges instated a rule that permitted investors to hold no more than three million ounces of silver contracts, and larger contracts must be sold by February 1980 to be brought into compliance.
The brothers didn’t trust the government or regulators, so instead of complying, they bought more futures worth 32 million ounces of silver for over $500 million. At that point, the Hunts controlled about 77 percent of all privately owned silver. Prices reached an all-time high of $50.50 per ounce in January 1980. As prices soared, people were scrounging silver out of their drawers and sofa cushions to sell. Police even issued a warning about a string of home burglaries targeting silver. Whether intentional or not, the Hunt brothers created one the biggest bubbles in the history of financial markets.
Shortly after, the commodity exchanges and the US government suspended the issue of new silver futures, only allowing investors to square up old contracts. This caused the price of silver to plummet down to $34 per ounce. The chairman of the Fed made a move to control inflation by ordering banks to curtail their loans for “speculative holdings of commodities or precious metals.” The Hunts, who had borrowed money to buy silver contracts, could no longer get loans.
In March 1980, the Hunts received a $135 million margin call from the various banks and firms that backed them, suddenly requiring more collateral for their debts. The brothers could not afford to pay it. The Bache Group, their brokerage firm, started selling their silver to meet it, which caused silver prices to fall once again to $11 per ounce. The government bailed out Bache to avert a national financial crisis.
The brothers were eventually convicted of market manipulation and fined heavily. A series of lawsuits and government penalties ate up the Hunts’ fortune. Over 20 financial institutions had given over a billion dollars in credit to the brothers. A bailout loan was required for them to start paying off those debts.
A New York City jury found the Hunts guilty of deliberately conspiring to corner the silver market. However, there are still some who disagree on this. There are those who believe that the brothers simply desired silver for its enduring value. Others think the brothers had no clue what they were doing the entire time, saying that perhaps they had more money than sense.
They fell into bankruptcy in 1988 and it took over a decade for them to settle with creditors. By the end of the ordeal, they wound up billions poorer than before they started buying silver; though they were still considered wealthy by most standards.
Until Bunker died in 2014, he denied that he and his brother plotted to corner the silver market. The price of silver is now approximately where it was when the Hunts began buying and the dollar still hasn’t collapsed. Herbert is still alive and retains a net worth of $2 billion.
Do you know of any other stories, tales, or legends involving precious metals? We just might feature it in our next Friday Fables blog!
