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03/21/2008

An Oldie but Goodie...The Hunt Brothers

Note: The most popular piece I’ve ever written, judging from the
Web traffic, was on the cornering of the silver market. In light of
the ongoing incredible volatility in the commodities pits, it’s a
good time to re-run it yet again. I’ve also added a few bits to
the original piece written back in Sept. 1999.

---

In 1973, the Hunt family of Texas, possibly the richest family
in America at the time (some say the world), decided to buy
precious metals as a hedge against inflation. Gold could not
physically be held by private citizens at that time so instead the
Hunts began to buy silver in enormous quantities.

By 1979, the sons of patriarch H.L. Hunt, Nelson Bunker and
William Herbert, together with some wealthy Arabs, had formed
a silver pool. In a short period of time they had amassed more
than 200 million ounces of the metal, equivalent to half the
world’s deliverable supply.

When the Hunts had first begun accumulating silver back in
1973 the price was in the $1.95 / ounce range. Early in ‘79, the
price was up to $5. By January 1980, it had risen ten-fold to
$50.06. [Intraday, it peaked at $54.]

But the Hunts were borrowing heavily to secure their purchases,
much of it at a time when the prime rate was 19%, so their costs
were huge. And while the brothers and their partners had
cornered the silver market, with the public joining in the chase as
everyone quickly cleaned out their attics and sold their tea
services, a combination of changed trading rules on the New
York Metals Market (COMEX), the intervention of the
Federal Reserve, and “the government of India allowing the
export of silver (which was the favorite form of savings in that
economy),” thus bringing a ton more on the market,* all
conspired to put an end to the game. *[David Colbert /
“Eyewitness to Wall Street”]

Silver began to slide, culminating in a 50% one-day decline on
March 27, 1980, what became known as “Silver Thursday,” with
the price plummeting from $21.62 to $10.80.

The collapse of the silver market meant countless losses for
speculators, let alone the Hunts, and even after working out a
debt repayment plan with their brokers, the Hunt brothers were
still forced to declare bankruptcy as by 1987 their liabilities had
grown to nearly $2.5 billion against assets of $1.5 billion. In
August 1988, the Hunts were convicted of conspiring to
manipulate the market.

One other experience in the silver bubble worth noting,
according to author Edward Chancellor (“Devil Take the
Hindmost”), is the experience of an official at the Peruvian
Ministry of Commerce, employed to hedge his country’s silver
production, who ended up losing $80 million by illicitly selling
silver short. Said Chancellor, “Although a relatively small sum
for a sovereign nation, it was an omen: the ‘rogue trader’ had
appeared on the modern financial scene.”

As for the U.S. equity market, it had its own troubles during the
rise and fall of silver. The Dow Jones peaked on February 13,
1980, at 903.84. The day of the collapse, March 27, the Dow
closed at 759.98, a decline of 16% in just 6 weeks. [However,
intraday, the loss between the 2/13 high of 918.17 and the 3/27
intraday low of 729.95 was actually 20%.]

For many traders the collapse in silver was the final straw for a
stock market already under siege from worries as diverse as the
Iranian hostage crisis, the Russian invasion of Afghanistan and
soaring interest rates. [The consumer price index climbed at a
13% rate for 1979. The prime lending rate hit 22% in early
1980]. But by year end the whole decline was almost forgotten.
The Dow finished the year at 963.99, thanks in large part to the
euphoria over the election of Ronald Reagan.

*And now for another side of the Hunt family that has nothing to
do with the financial markets.

On the morning of November 22, 1963, President John F.
Kennedy was shown an inflammatory full page advertisement
that appeared in that day’s Dallas Morning News. The ad asked
twelve loaded questions, including: “Why did you host, salute
and entertain Tito – Moscow’s Trojan Horse?” “Why has the
Foreign Policy of the U.S. degenerated to the point that the CIA
is arranging coups and having staunch Anti-Communist Allies of
the U.S. bloodily exterminated?” Jackie Kennedy was sickened
by the display. JFK said to an aide, “We’re heading into nut
country today.” Hours later he was assassinated. The ad was the
responsibility of Nelson Bunker Hunt (and an associate). H.L.
Hunt was a leader of the John Birch Society, the anti-Semitic and
racist organization.

Sources:

Edward Chancellor, “Devil Take the Hindmost”
David Colbert, “Eyewitness to Wall Street”
Harold Evans, “The American Century”
David Hackett Fischer, “The Great Wave”
John Steele Gordon, “The Business of America”
Suzanne McGee / Wall Street Journal
Richard Reeves, “Profile of Power”

Wall Street History returns next week.

Brian Trumbore



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Wall Street History

03/21/2008

An Oldie but Goodie...The Hunt Brothers

Note: The most popular piece I’ve ever written, judging from the
Web traffic, was on the cornering of the silver market. In light of
the ongoing incredible volatility in the commodities pits, it’s a
good time to re-run it yet again. I’ve also added a few bits to
the original piece written back in Sept. 1999.

---

In 1973, the Hunt family of Texas, possibly the richest family
in America at the time (some say the world), decided to buy
precious metals as a hedge against inflation. Gold could not
physically be held by private citizens at that time so instead the
Hunts began to buy silver in enormous quantities.

By 1979, the sons of patriarch H.L. Hunt, Nelson Bunker and
William Herbert, together with some wealthy Arabs, had formed
a silver pool. In a short period of time they had amassed more
than 200 million ounces of the metal, equivalent to half the
world’s deliverable supply.

When the Hunts had first begun accumulating silver back in
1973 the price was in the $1.95 / ounce range. Early in ‘79, the
price was up to $5. By January 1980, it had risen ten-fold to
$50.06. [Intraday, it peaked at $54.]

But the Hunts were borrowing heavily to secure their purchases,
much of it at a time when the prime rate was 19%, so their costs
were huge. And while the brothers and their partners had
cornered the silver market, with the public joining in the chase as
everyone quickly cleaned out their attics and sold their tea
services, a combination of changed trading rules on the New
York Metals Market (COMEX), the intervention of the
Federal Reserve, and “the government of India allowing the
export of silver (which was the favorite form of savings in that
economy),” thus bringing a ton more on the market,* all
conspired to put an end to the game. *[David Colbert /
“Eyewitness to Wall Street”]

Silver began to slide, culminating in a 50% one-day decline on
March 27, 1980, what became known as “Silver Thursday,” with
the price plummeting from $21.62 to $10.80.

The collapse of the silver market meant countless losses for
speculators, let alone the Hunts, and even after working out a
debt repayment plan with their brokers, the Hunt brothers were
still forced to declare bankruptcy as by 1987 their liabilities had
grown to nearly $2.5 billion against assets of $1.5 billion. In
August 1988, the Hunts were convicted of conspiring to
manipulate the market.

One other experience in the silver bubble worth noting,
according to author Edward Chancellor (“Devil Take the
Hindmost”), is the experience of an official at the Peruvian
Ministry of Commerce, employed to hedge his country’s silver
production, who ended up losing $80 million by illicitly selling
silver short. Said Chancellor, “Although a relatively small sum
for a sovereign nation, it was an omen: the ‘rogue trader’ had
appeared on the modern financial scene.”

As for the U.S. equity market, it had its own troubles during the
rise and fall of silver. The Dow Jones peaked on February 13,
1980, at 903.84. The day of the collapse, March 27, the Dow
closed at 759.98, a decline of 16% in just 6 weeks. [However,
intraday, the loss between the 2/13 high of 918.17 and the 3/27
intraday low of 729.95 was actually 20%.]

For many traders the collapse in silver was the final straw for a
stock market already under siege from worries as diverse as the
Iranian hostage crisis, the Russian invasion of Afghanistan and
soaring interest rates. [The consumer price index climbed at a
13% rate for 1979. The prime lending rate hit 22% in early
1980]. But by year end the whole decline was almost forgotten.
The Dow finished the year at 963.99, thanks in large part to the
euphoria over the election of Ronald Reagan.

*And now for another side of the Hunt family that has nothing to
do with the financial markets.

On the morning of November 22, 1963, President John F.
Kennedy was shown an inflammatory full page advertisement
that appeared in that day’s Dallas Morning News. The ad asked
twelve loaded questions, including: “Why did you host, salute
and entertain Tito – Moscow’s Trojan Horse?” “Why has the
Foreign Policy of the U.S. degenerated to the point that the CIA
is arranging coups and having staunch Anti-Communist Allies of
the U.S. bloodily exterminated?” Jackie Kennedy was sickened
by the display. JFK said to an aide, “We’re heading into nut
country today.” Hours later he was assassinated. The ad was the
responsibility of Nelson Bunker Hunt (and an associate). H.L.
Hunt was a leader of the John Birch Society, the anti-Semitic and
racist organization.

Sources:

Edward Chancellor, “Devil Take the Hindmost”
David Colbert, “Eyewitness to Wall Street”
Harold Evans, “The American Century”
David Hackett Fischer, “The Great Wave”
John Steele Gordon, “The Business of America”
Suzanne McGee / Wall Street Journal
Richard Reeves, “Profile of Power”

Wall Street History returns next week.

Brian Trumbore