The Origin of Silver Thursday
In the late 1970s, the Hunt brothers, Herbert and Nelson, embarked on a risky mission to corner the silver market, driven by their belief in silver as a hedge against inflation. They accumulated vast amounts of physical silver and futures contracts, causing silver prices to skyrocket. However, their aggressive tactics triggered a short squeeze, and the U.S. government intervened, leading to the infamous "Silver Thursday" crash. The Hunt brothers faced legal consequences, and their market manipulation left a lasting impact.
Herbert and Nelson, the sons of oil magnate H.L. Hunt, inherited their father's immense wealth in 1974. They ventured into the commodities market, particularly silver, with a unique strategy. The Hunt brothers anticipated that soaring inflation would turn silver into a safe haven asset, akin to gold. Nelson Hunt, in particular, believed that paper currency investments would lose value due to inflation.
Their approach involved purchasing physical silver and futures contracts, a significant departure from the typical practice of settling futures contracts with cash. Instead, the Hunts took delivery of physical silver, amassing substantial silver reserves while using their substantial cash resources to acquire even more futures contracts. This relentless buying spree caused silver prices to surge, ultimately exceeding $50 per ounce.
To magnify their impact, the Hunt brothers borrowed heavily, leveraging their family's reputation and financial stability to secure loans at favorable terms. They also convinced wealthy investors worldwide to buy silver and futures contracts, effectively pooling their resources to further inflate silver prices.
The Emergence of a Short Squeeze
As the Hunt brothers continued their buying frenzy, they significantly reduced the available silver supply in the market. This, coupled with their relentless purchasing, pushed silver prices even higher. In the commodities market, there are both long and short positions, but in this case, short sellers were outnumbered. A short squeeze developed as the Hunts continued to accumulate silver stocks and take delivery of futures contracts, causing their position to reach a staggering $4.5 billion.
Although some individuals sold their silverware and coins to capitalize on high silver prices, the Hunts controlled more than two-thirds of the silver market through futures contracts, leaving little room for others.
Concerned about the Hunts' manipulation of the nation's silver reserves, the U.S. government took action. The fact that this market cornering involved Middle Eastern investors further fueled government scrutiny due to the recent 1970s oil crisis. Federal commodities regulators introduced special rules to halt the issuance and sale of new long position contracts for silver futures, temporarily suspending the typical rules of the commodities market. This move thwarted the Hunts' ability to increase their positions.
With long positions frozen, silver prices began to decline. Margin calls, necessitated by loans, began depleting the Hunt brothers' reserves, leading to daily payments of millions in calls, storage fees, and interest. To further exacerbate their situation, the Federal Reserve urged banks to cease lending for speculative activities. The Hunts' credit subsequently dried up, creating concerns that they might fail to meet margin requirements with new loans, potentially causing a broader financial crisis.
On "Silver Thursday," March 27, 1980, the Hunt brothers failed to meet a margin call, triggering a market crash. Silver plummeted from its peak of $50.35 to under $11 per ounce.
The Aftermath and Legal Consequences
In the aftermath of their market maneuver, government officials considered a bailout to prevent systemic instability. However, this option was vetoed to avoid appearing supportive of risky financial speculation. The Hunt brothers eventually secured a private bailout from a consortium of banks and companies, which saved them from complete financial ruin.
Subsequently, Herbert and Nelson Hunt faced Congressional hearings, legal charges, fines, and bankruptcy proceedings. It took nearly a decade for them to unwind their silver holdings and meet their obligations to creditors, leaving them considerably poorer, though still wealthy by most standards.
Whether intentional or not, the Hunt brothers' attempt to corner the silver market created a speculative bubble that profoundly impacted the financial system. This episode serves as a reminder that excessive enthusiasm in any market, whether stocks, commodities like silver, or real estate, can have severe repercussions. Ultimately, market manipulation can come back to haunt those who engage in it, causing lasting consequences for both individuals and the financial industry.