In the 1970s, with the United States struggling with high inflation, two brothers, Nelson and Herbert Hunt, decided to take a bold bet that would cause silver prices to skyrocket for a while.
The Hunt brothers were convinced that high inflation would erode the value of investments linked to the strength of the dollar as a currency. Typically, investors use precious metals like gold and silver as a hedge when they expect the dollar to depreciate.
Gold being expensive, the Hunt brothers turned to the silver market. They had recently inherited a fortune after the death of their father, oil tycoon HL Hunt, in 1974.
Of the two brothers, Nelson was extremely bullish on silver and expected prices to increase tenfold due to likely safe-haven purchases from investors looking to hedge against a weak dollar.
The brothers stored all the money they could get their hands on. They bought physical silver and futures using money from their inheritance. Their strategy was to drive up prices by creating a shortage of money.
Typically, futures contracts are settled in cash, which is the differential between the price at the start of settlement and the price on the expiration day. But the Hunt brothers, instead of squaring their positions, chose to take delivery of the money.
This relentless buying began to push silver prices higher, up to $ 50 an ounce from $ 11. As the money from their inheritance began to run out, the brothers began to buy money, using borrowed money. Due to the family’s strong credentials, they were able to borrow money at below market interest rates.
Blown away by their initial success, the brothers quickly began approaching investors outside of the United States and advocated for investing in silver. The audience also included investors from Saudi Arabia. The brothers were successful in selling their story and raising funds, which again bought more money.
As silver prices rose, many traders began to short silver futures, confident that the high prices would not hold up. With money borrowed as well as money raised from global investors, the Hunt brothers were able to buy whatever silver bear merchants threw away.
As prices remained high, short sellers had no choice but to start hedging their positions by buying silver at the price at which they could get it. This pushed the prices of silver upward, as it attracted other buyers looking to earn quick cash from the rise in the price of silver.
At one time, the value of the silver positions amassed by the Hunt brothers was worth $ 4.5 billion, or around $ 15 billion today.
People began to pawn or sell their silverware and coins to take advantage of the silver price frenzy.
Ultimately, the US government had to intervene. He saw the Hunt brothers’ action as an attempt to manipulate the country’s silver reserves. And seeing the involvement of investors from the Middle East has driven the authorities crazier. Indeed, just a few years ago, the Middle Eastern countries, led by Saudi Arabia, had played a decisive role in the rise in oil prices, which resulted in the US economy losing ground. been hit hard by inflation.
Soon, regulators rushed to introduce rules to prevent the buying or selling of long-term contracts against silver futures, suspending market fundamentals. However, this prevented Hunts from increasing their position.
With long positions frozen and short sellers continuing to attack, silver prices began to weaken.
And suddenly the Hunts became the hunted. As prices continued to fall, the Hunt brothers were inundated with calls from brokers asking them to deposit additional funds towards margin.
The shoe was on the other foot, and the Hunt brothers were paying millions of dollars in margin calls, storage fees, and interest.
However, Hunt’s name still allows them to borrow money on a short-term basis – until the US Federal Reserve steps in and orders the banks to stop lending money for speculation.
Under increasing pressure from the authorities, the Hunt brothers’ lines of credit began to dry up. Word spread that the brothers were struggling to answer their margin calls. Emboldened by this information, the bears moved to kill, adding to the pressure on the silver coins.
On March 27, 1980, a Thursday that would later become “Silver Thursday” in history, the Hunt brothers for the first time missed their margin calls.
It was now evident that the Hunt brothers no longer had the power to support the prices of silver. The panic sell ensued, pushing prices down to $ 11 an ounce.
The Hunt brothers suffered a massive loss and a few backing banks and brokerages went bankrupt. The government has stayed on the sidelines, not wanting to be seen bailing out speculators.
They eventually managed to organize a private bailout from a consortium of banks and companies. They were then dragged to Congress, reprimanded, fined and forced into bankruptcy.
It took them over a decade to liquidate their cash holdings and satisfy creditors. Some say that even though they found themselves in the misery of billions more, they were rich by most standards.
(Edited by : santos)
First publication: STI