iI have always been fascinated by Silver or ‘Poor Man’s Gold ‘as it sometimes called by miners.
I once owned a large piece of the Keely Silver Mine near Cobalt Ontario reportedly the richest Silver Mine in the World, at least that’s what Murray Watts, the famous Canadian prospector told me. Murray had been involved a failed effort to put the old mine workings back into production and was keen to find a financier who could take the project forward.
I was impressed by the maps of underground workings that showed ore shoots that produced over 5,000 ounces of silver per ton ($100,00 /ton at todays’ price for silver). I was also hopeful that the price of Silver would remain high enough to raise the capital to kick-start production once more. But it was not to be, as the events of ‘Silver Thursday’ and the debacle of the Hunt Brothers attempts to ‘corner’ the Silver Market got in the way.
No one knows for sure why Nelson Bunker, and William Herbert, two of the famous Texas Hunt Brothers, tried to engineer a ‘corner’ on the market for Silver. It is said that they were very upset with the US Government for not compensating them for the seizure of Libyan Oil production owned by their Placid Oil. They had also been very verbal concerning the galloping inflation of the 1970s’ bought on by the Vietnam War and President Johnson’s Great Society. But a snit and a minor dent in their net worth, hardly explains the suicidal risks of making a gigantic very public bet on a well established market such as COMEX Silver.
Trading oil, an everyday commodity, is very different from trading silver, a precious metal with a large monetary component. The value of Silver has a very close historical relationship to that of gold. The Romans created Silver coins as specie with a fixed ratio to gold that provided a stable medium of exchange and store of value for three hundred years. Following the 16th century discovery of Bolivian silver Spanish Pieces of Eight formed a Silver Standard again with a fixed ratio to gold for the conduct of international trade. In 1717 the master of he Royal Mint in London Sir Isaac Newton introduced a new fixed ratio for Stirling Silver of 15 ounces of silver to one ounce of gold. This had the effect of placing the country on the gold standard that was not formally adopted until 1821.
Since those halcyon days silver had gradually been debased as a currency, to the point where it now takes nearly 60 ounces of silver to buy one ounce of gold. The reasons for this lie primarily with the large industrial demand for silver, as opposed to the solely monetary use for gold. Silver values can and will diverge from this ratio in the short run but have shown a remarkable tendency of returning to the new norm.
The designation ‘corner’ is an old saying that was used in the early days of Wall Street, and the New York Stock Exchange. Most investors buy or ‘go long’ shares because they believe they will increase in value. There are a relative fewer investors who take the opposite approach and sell borrowed shares, or go ‘short,’ because they believe the value will go down. If they are right and the shares do go down in value they buy shares on the open market to repay the borrowed shares and take their profit in cash. A ‘corner’ is created when a player (long or short) miscalculates the available supply of shares and gets caught in a ‘squeeze’
The Hunt Brothers may not have acted alone in their insane caper. Rumor has it that they had partnerships with various mid-eastern oil interests who actually took delivery of the metal (as opposed to buying futures contracts on margin). This legitimate step may have saved the market from total collapse when matters spun out of control in 1979.
The buying frenzy had taken the price of silver from $6 per ounce to $48 an ounce, an increase of over 700%. At this price industrial users of silver were forced out of the market, as were more traditional users such as jewellers. Now the Hunt Brothers had everyone’s attention and the Regulators stepped in.
In January 1980 COMEX adopted “Silver Rule 7” that placed heavy restrictions on the purchase of commodities on margin. The effect was a classic “corner’ when silver prices dropped over 50% in just four days and the Hunt’s were unable to meet their margin calls amounting to hundreds of millions of dollars.
In their exuberance the regulators failed to grasp the very real danger, that a possible Hunt insolvency would take down the agents, some of Wall Street’s better known brokers, who had foolishly granted the huge amounts of credit needed to make the “corner’ succesful.
In a bizarre twist, the New York Federal Reserve Bank caused several its member New York commercial banks to lend the Hunts $ 1.3 billion needed to unwind the COMEX trades and save the brokers.
If the practice of lending money to perpetrators of financial schemes gone wrong seems strange, it should not. The Federal Reserve Bank of New York is, above all, the head of a club of members that includes thousands of banks. When trouble strikes it is in all of their interests that the money be found (or printed) to save the criminals, so to save the system. The most recent example is the $85 billion rescue of A.I.G, the giant Insurance group that wrote the Credit Swaps that made the Sub-Prime Market debacle possible.
In this case the brokers led by Prudential Bache were rescued so that they could be bought out by some of the same commercial banks who provided the rescue funds, who in turn were rescued after the financial collapse in 2008.
As for the Hunts they lost a large portion (but by no means all) of their fortune. They were later found responsible;e for civil charges of conspiracy to manipulate the price of Silver and forced to pay fines of $134 million to a Peruvian Mineral company. No criminal charges were ever bought.
And so the system lives on.