The Great Silver Caper is the title of a chapter from the fascinating book, "The Big Rich" by Bryan Burrough. The book is about the rise and fall of the greatest Texas oil fortunes. This particular chapter tells the story of Nelson Bunker and Herbert Hunt and their silver investment. This article is from notes taken from that chapter.
"I am not a speculator, I am not a market squeezer." Bunker Hunt told a reporter in January of 1980, the month where the silver price would see $50 an ounce. "I am just an investor and holder of Silver."
The Hunts brothers came from a family that grew rich from Texas Oil. Over the years, the family diversified their wealth going into sugar and real estate. Bunker was the big picture guy while his brother Herbert was the detail man. Bunkers investment ideas were at best unconventional describes Burrough, and at worst, stupid. Bunker Hunt was the product of a single semester at Texas State University, a man who believed in Jewish, Communist and Rockefeller plots to subvert the world. Bunker ignored the ideas of the best and brightest of Wall Street and devised his own: Silver.
Bunker started small in 1970 buying silver when it was only $1.50 an ounce. Over the next 3 years Herbert and Bunker slowly bought silver via 5000 ounce "penny packets" through the Wall Street brokerage, Bache Group. By 1973, Silver doubled to $3 an ounce.
In 1973, Herbert read the book "Silver profits in the Seventies" by Jerome A. Smith, an author who specialized in doom and gloom economics. Smith argued that the world faced political and economic collapse and that wealthy people needed to buy gold and silver to protect their wealth. Bunker didn't read it as he wasn't much of a reader Burrough says, but Herbert thought it was brilliant.
So now by mid 1973, through various brokerages, the Hunt brothers began buying silver contracts on the New York market giving them the right to buy silver at a certain price by a certain date. Normally, no one ever actually buys the silver but rather just bets on the price of silver with these contracts.
By early 1974, the Hunts had enough contracts that gave them the right to buy fifty-five million ounces of silver, which was roughly 9 percent of all the silver on earth. No one, not even Governments controlled more.
For the cost of $175 million, the Hunt Brothers took delivery on their contracts. This physical silver was then transported, some 40 million ounces to Switzerland to be stored in 6 different banks while the remaining 15 million ounces were stored in Chicago and New Jersey.
The Hunts were buying the silver in secrecy, but warehousing 9 percent of all the worlds silver wasn't so easy to be kept a secret. By the Spring of 1974, rumors began to fly and the one question the spun through the silver exchanges was: Who the hell is Nelson Bunker Hunt?
Traders feared now on one hand, if the Hunts decided to sell, the price of silver would collapse but on the other hand, traders believed that the Hunt Brothers would in fact be buying more. Thus the price rose to $6 an ounce by the Spring of 1974.
In April of 1974, Bunker went to visit the floor of the New York commodities exchange, the Comex. Traders stopped and starred at Bunker as he waddled his way through the aisles as he studied this strange new world of commodities trading.
A Barron's reporter cornered Bunker before he left the exchange and asked him what his intentions were to which Bunker replied: "Just about anything you buy, rather than paper, is better. You're bound to come out ahead in the long pull. If you don't like gold, use silver. Or diamonds. Or Copper. Buy something. Any damn fool can run a printing press."
Over the following months, the hubbub over the Hunt Brothers and their silver plans drifted away in the minds of traders. Silvers price drifted lower one dollar, then two dollars before settling just under four dollars an ounce.
Back in Dallas, Bunker was perplexed. Trying to figure out how he could get silver to go back up again, he began to talk with leading silver dealers. One such dealer, out of Abu Dhabi named Haji Ashraf. They met in London for lunch and Ashraf suggested getting wealthy Arabs to begin buying silver.
Bunker thought it was a good idea and in March of 1975, took a flight to Irans capital city, Terhan. His goal was to meet with the Shah of Iran. His meeting would be arranged by a prince Bunker had met while in prep school. Bad news was that when he arrived, the Shah was away and instead Bunker met with the finance minister, who didn't care much for Bunkers plans.
Bunker then attempted to meet with King Faisal of Saudi Arabia to attempted to pitch him on a plan to buy silver together, to thus drive the price higher. That meeting was also never made because word got around of Bunkers visit to Tehran and the meeting arranger didn't want to let the Saudi King feel he was second choice.
Bunkers plans of gaining an additional Silver buyer were failing. At the same time, regulations on commodities trading started to get more controlled. The Commodities Futures Trading Commission was formed, the CFTC and new trading limits were put on how much of a commodity a single entity could buy and sell.
Bunker used a sugar company he owned a large amount of shares in, Great Western Sugar, he acquired in late 1974 and one of that companies subsidiaries to begin buying commodities across the board, copper, gold, sugar and lots and lots of silver.
By June of 1976, Great Western Sugar controlled 21 million silver contracts. By August, the price of silver reached $5.20 but declined back to $4 an ounce by the end of 1976.
Because Great Western Sugar was a public company, shareholders of even the SEC might have looked unkindly about the subsidiary and all their commodity trading. So Bunker and Herbert simply bought out the remaining shareholders and took the company private so that they could now do what they want.
In the Spring of 1977, using Great Western Sugar, the Hunt Brothers did a hostile tender offer for a company called Sunshine Mining out of Idaho. It was the nations largest silver mining company. This gave the Hunt Brothers control over another 30 million ounces of silver and qualified them as a commercial users of silver, exempting them from most trading limits.
At this point in the Chapter, Burrough defines what it means to corner a market. "Cornering a market is defined by an illegal attempt, typically by a group of investors working together in secret to by enough of a particular commodity to be able to dictate its price."
Hunts attorneys advised them that Great Western's commodities purchases could be in violation of cornering the market rules. So Bunker halted his purchases through Great Western Sugar.
By 1978, 5 years after the Hunt brothers began buying their silver, the price reached $6 a ounce. The same price it was back in 1974. Bunker simply could not get the price to go higher no matter what he seemed to do. However, at $6 an ounce, had the Hunt Brothers sold their silver, they would have realized a profit of a few hundred million dollars. Bunker wasn't interested in a double or tripling of his money, he wanted a home run.
On Oct. 1st, 1978, at a Horse auction outside of Paris, Bunker was introduced to Naji Robert Nahas, a Lebanese born, Egyptian raised, Brazil based businessman who acted as a middle man for several Saudi Arabian sheikhs attempting to invest in South America. They started out talking about horses but ended up talking about silver. Nahas agreed with Bunker and thought it was something that might interest Prince Abdullah, a Saudi who headed his countries internal security forces and was also a wealthy investor.
Bunker began to get excited now that he has sparked interest in the Saudi's. He ordered 50 copies of a bullish silver analysis in Myers Finance and Energy Report and had them translated into Arabic and mailed them to leading Saudi investors.
In the winter of 1978-1979, due to a variety of factors like rising inflation, interest rates, silver prices began to rise, $7, $8.
Did Bunker and the Saudi's begin to corner the market? No one could tell.
On July 1st, 1979, Bunker and Herbert would form a legal partnership on the Island of Bermuda, with front men representing the Saudi Prince Crown himself, Prince Fahd, who was running the Saudi Central Bank. The partnership was called International Metals Investment Company, IMIC for short. Shortly after, the company bought contracts to buy 43 million ounces of silver. That plus Bunker and Herberts 55 million ounces, gave them a total of 12-15% of the worlds silver supply.
Nahas got involved soon after forming his group, Nahas-Waltuch, formed with a man named Norton Waltuch, buying a total of 42 million ounces of silver. A herd began to form from other mysterious Arab trading companies buying silver trying to get a piece of the profits that were being had in silver.
Burrough describes it by saying that half the Pursian Gulf seemed to know what was in the works, the CFTC hadn't had a clue. Reflected in the minutes from a meeting on July 27th, 1979, the agencies top men hadn't a clue of the Hunts intentions.
Burrough details the conversation at the meeting from the minutes:
DAVID GARTNER: Can I ask one general question? The Hunts, every week we see them in something, silver, soybeans, oil, livestock, whatever. Do you think there's any possibility these guys are just having fun, just horsing around? Like playing monopoly like you and I might do, or nickel and dime poker. Is this a little game they're going through?
JOHN MIELKE, CFTC DIRECTOR OF MARKETS: Well, they're playing with some awful big bucks. I was looking at their silver position and on the Chicago and New York combined - and I'm talking basically about the two brothers, Bunker and Herbert - their position....is worth $475 million.
GARTNER: That's a lot of money.
MIELKE: That's a lot of money...
GARTNER: If just seems to me there are people with a hell of a lot of money and not a lot to do with their time, fiddling around like you and I might play a game of checkers.
A few weeks later, by August of 1979 word began to get around about IMIC's and Nahas-Waltuch purchases and now the price of silver got over $10 an ounce as traders were taking notice.
It took the CFTC a few weeks to figure out who the owners were of IMIC and once they knew, Herbert would confirm his family involvement. Bunker meanwhile would meet with Nahas in Paris to presumably align the groups buying strategies. By Oct.1st, silver reached $17.88 an ounce.
By Mid October, the CFTC were finally catching on. The now knew the two groups doing the buying were the Hunt Group and Nahas-Waltuch group. Also, it was then that the officials at the two major exchanges in Chicago and New York were facing their nightmare scenario.. they were running out of silver!
The Hunts and their allies controlled 62% of all the silver in the COMEX warehouses and 26% of all the silver held by the Chicago board of Trade, the CBOT, plus all the silver they held in Switzerland, the 40 million ounces they first bought in 1974.
The Chicago board of trade asked Herber to stop buying and Herbert said he would. But then more buying came in and it was found to have come from accounts held by the Hunts children. Bunker was called to Washington to sit with the CFTC staff to explain what he was doing. Bunker would deny that he was not in any way trying to corner the market. He admitted to knowing a Saudi or two, but no conspiracy he told the staff. The CFTC was satisfied but the CBOT was not.
The Chicago Board of Trade fired back with a new rule limiting silver holdings to 3 million ounces and anyone who held more than 3 million ounces had to reduce their holdings by April 1980.
Bunker of course was furious and pledged to fight these new rules in court. Meanwhile, the Hunt brothers and the Saudi's kept buying. $20 an ounce up to $30 an ounce and by the end of 1979, Silver would be $34.45.
On January 7th, the Comex followed the lead of the CBOT and they too announced trading limits of 10 million ounces per individual.
Bunker bought more! He ordered 32 million ounces at a cost of nearly $500 million. The silver price went over $40 and by January 17th, 1980, Silver would see $50 an ounce. The Hunts holdings were worth $4.5 billion of which $3.5 billion was profit. That would be more profit than all the 4 oil families from Texas made in their entire lives, the Hunt family included.
One CFTC official estimated that the Hunts and their Saudi allies had 77% of all the silver in the world while another suggested, "soon, they'll have all the silver in the world."
The CFTC was now in a panic and announced a stunning new restriction: No more silver purchases would be allowed - none - only sales to groups the exchange specifically approved. Bunker pounded his desk in Dallas Burrough writes. Burrough goes on to say, the powers that be were changing the rules just because he was winning their game.
The Hunt Brothers were trapped. They couldn't buy any more silver and if they sold, they risked a selling panic. The next day, January 22nd, the price of silver would plummet to $34 an ounce. The price would stabilize for the next couple of weeks in the upper thirties before falling to $30 by the end of February. Bunker tried to see if By March 14th, silver was down to $21 an ounce. Bunker and Herbert had now experienced a paper loss in 55 days of more than $2 billion.
The Hunt brothers were now running out of money. Most of the purchases made by the Hunt brothers were on margin, borrow money. Money borrowed from the banks and brokerages that handled his trades. They simply used their initial silver purchase of 55 million ounces that cost them $175 million as collateral to buy most of the silver alongside the Saudi's.
Between the carrying costs of the physical silver itself, the cost of the margin loans, it all added up. By Mid March, margin calls began to come in. First at the brokerage, Bache.
Because oil was also doing well in the late 1970's, the Hunts borrowed against their oil holdings as well. They bought not only silver but stocks too. Bunker also owned 700 thoroughbreds race horses! He spent $50 million on ancient coins from the Greek and Roman Empire. Herbert bought nearly just as much worth but in Byzantine empire era coins.
The rules kept changing that would now really crush the Hunt brothers. On March 14th, 1980, Volker, then head of the US Federal Reserve Bank, attempting to put a lid on the inflation rate, ordered US banks to begin curtailing their loans by instituting special credit restraint programs - Banks could no longer make loans that applied to financing of speculative holdings of commodities of precious metals. American banks and brokerages houses wouldn't lend the Hunts another cent. ( It seems to me this was a policy specifically directed at the Hunt brothers as a way to punish them, but we can't prove anything.)
Bunker flew to Europe hoping to get more loans. But "Volker had spoken" and the European banks followed suit. No more loans for the Hunts.
By March 17th, just 3 days after Volkers announcement, the Hunts couldn't meet their margin calls. Attempting to see of the Saudi's could help him, it turned out they too had margin calls of their own. Bunkers only hope was for the price of silver to turn higher.
March 25th, another margin call, $135 million, again from Bache. Bunker capitulated by telling Herbert to "Shut it down." They could no longer meet their margin calls and would be forced to sell their physical silver, value at $100 million, for a loss.
Bache informed the CFTC that the Hunts would likely loss $86 million in the next days trading of which this was money the Hunts didn't have... and neither did Bache.
Now all of a sudden, a major Wall Street investment bank might go under. (A sort of a "too big too fail" as we might call it today and well all know what that means - bailout time.) Back in Washington, Paul Volker, officials at the SEC and the Treasury dept. rushed to an emergency meeting.
On Tuesday, March 25th, silver was $20.20. The next day, when the Hunts began selling, the price dropped to $15.80 an ounce.
Bache's Chairmen, Harry Jacobs, was starring at disaster Burrough writes. Because you see, every dollar Jacobs lent to the Hunts he borrowed from someone else. Perhaps that someone else borrowed from someone else. (This is why today, we have too big to fail and why no country in Europe has been allowed to default.)
At this point, of the Hunts could sell their silver at $15.80, they would be able to sell their silver for $2.5 billion and still wind up making a $1 billion profit. But with all that selling that would be needed, the price would surely fall.
Rumors were sweeping Wall Street: The Hunts had a $1 billion margin call .. Bache had a $1 billion margin call. Herbert asked of the CFTC could close the market and settle all silver contracts at $15.60 but that plan fell through. Silver closed the following day at $10.80.
It didn't fall enough to have bankrupted the Hunts or Bache. They survived. The price then went back up to $12 an ounce by the end of Friday. It seemed everything was going to be ok. But then news came out that the Hunts owed Englehard $665 million for 19 million ounces of silver due that Monday.
The Hunts faced another potential bankruptcy and more reason to have to sell more silver, which would likely again, create a panic. The Englehard people flew in to Dallas to meet with the Hunts. The CEO of Englehard, Milton Rosenthal was straightforward: Pay on Monday or be forced into bankruptcy.
The only thing that could save the Hunts now was a big loan, in essence, a bailout. That very weekend, there was a conference of the Federal Reserve City Bankers Association in Boca Rotan Florida that included bankers were the Hunts held most of their loans. Volker was there as well and he gave an approval for some kind of a bailout package for the Hunts. (and Bache and the folks the Bache people owed money too and so on.)
The Hunts and the Englehard execs flew to Florida and at 10:00 p.m. Sunday night, began a meeting between the banks, the Hunts and Englehard. The meeting went past midnight and Volker would occasionally leave his room in pajamas pants and a suit jacket and peek into the meeting to see how things were going.
In the end, a deal was struck. The US banks agreed to lend $1.1 billion so the Hunts could pay off their silver debts. This loan was to be backed by all their oil properties. So long that oil prices kept rising, they would be ok. But that's another story.
Here is a chart of silver from 1978 - 1982.
We could argue that the only reason silver did what it did was because of the concentration of strong buyers who relentlessly bought.
What's happening today with the price of silver seems reminiscent to what was happening in the 1970's.
Today, I think part of the driver for higher silver prices is negative real interest rates being driven by the Fed's Zero Interest Rate Policy. That coupled with quantitative easing by the Fed.
It takes effort and energy to mine an ounce of silver but only a push of a button to create money via a printing press.
So what can we learn from the experience of the Hunt Brothers?
- Buying on Margin is super risky and can cause a great wealth to be gone in a matter of months or even weeks.
- Watch out for changes in regulation! If the price of silver today continues to run higher, better to keep an eye on regulations coming from the CFTC to the CBOT all the way up to the Fed as a major change in the rules could once again be the catalyst that takes silver down.
- Bubbles in assets usually tend to go back to where they started. Silver in mid 1979 was $10 an ounce, right before it would make its historic move to over $50 an ounce by January 1980. By the fall of 1981, silver would again return to $10 an ounce.
- Ultimately, watch the Fed. If they end QE2 early or fail to announce a QE3 or other quantitative easing program, we have to remember that there is over $52 trillion in total debt (pg 60) out there between consumers, businesses, financial institutions and state and Federal Governments making that a major short on the dollar itself. So the dollar can become greatly in demand because there would be a great need to pay off debts and in the event of less dollars being created via quantitative easing, I would believe we would see a surging dollar and collapsing commodities prices like we saw in the Fall of 2008.
Disclosure: I am long SLV, CEF, SSRI.