The Hunt Brothers Disaster

A Cautionary Tale of What Happens when Greed Takes Over the Precious Metal Industry

By Vancouver Gold.ca

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If you ever want to know exactly what happens when greed takes over in the precious metals industry, you need to look no further than these two brothers from Texas. I cant imagine you or I getting this far into the industry, but its a great illustration of what can happen. Bunker and Herbert Hunt decided to take long term hold positions and physical delivery of as much silver as possible in 1979. They did nothing illegal, but because of their secrecy and their intention, the Chicago Board of Trade (CBOT) changed the rules in the middle of the game and the Commodity Futures Trading Commission (CFTC) implemented new regulations. Shortly after, the Hunts were bankrupted. All they really did was simply request the delivery of the physical metal for which they held valid, legal contracts. The suppliers of silver were unable to meet the delivery at any price because there wasnt enough deliverable silver in the marketplace. This set off panic and the price dropped drastically. In the story, Bunker and Herbert Hunt, who initially made their fortune in the oil industry, amassed a huge silver hoard that they justified with ever-increasing prices along the way. Beginning in 1973 and continuing into 1974, they slowly began purchasing silver futures contracts totaling fifty-five million ounces and then eventually they took actual delivery of all the silver. During that time, the brothers were concerned with possible inflation and the potential collapse of the value of precious metals. Following some of the changes put in place by President Nixons administration and the budget process, the Hunts arranged to transfer most of their silver bullion to Switzerland. On August 1, 1979, a new name showed up on the daily reports of silver purchasers. The buyer was another Hunt brothers company named International Metals Investment Company. The new orders were placed through an account at
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Merrill Lynchs Dallas office that was opened by Herbert Hunt just seven days earlier. It sparked a trend and suddenly other buying syndicates with big money behind them entered the silver market in the first week of August without being noticed. In the fall of 1979 the silver price doubled from $8 to $16 an oz in only two months and several exchange organizations started to panic. Many buyers, including the Hunts through their International Metal Investment Company were taking delivery on all their silver contracts and a worldwide shortage was starting to be noticed. But the Hunt brothers continued to accumulate silver throughout 1979. In late 1979 the rules were changed again by several regulating authorities. Now no single investor could hold over 3 million oz of silver contracts and the actual margin requirements were raised. All contracts over 3 million oz per trader had to be liquidated by February of 1980. The Hunts accused the authorities and their board members of having a financial interest in the silver market themselves. Investigations later found that many did have substantial silver short positions. This position only made things worse for the silver market and its pricing. The Hunts knew that a shortage existed or they would not be making such drastic changes. Instead of complying with the new regulations, the Hunts set out to buy and accumulate more silver. The price on the last day of 1979 was $34.45/oz. At this point Bunker and Herbert personally held 40 million oz in Switzerland and 90 million oz of bullion they owned through International Metals Investment Company. In addition to all that, they had contracts on another 90 million oz due for delivery that March, bringing the grand total to 235 million oz. Their younger brother, Lamar, had now also entered the arena and had taken a $300 million dollar, 10 million oz, silver position by the end of 1979. The price of silver continued to climb. On January 17, 1980, it hit $50 an ounce. At that time, the Hunts held $4.5 billion in silvera $3.5 billion gain on their $1 billion investment. The various limitations and rule changes imposed by the commodities markets had no effect but to push the price of silver higher, until
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finally the COMEX announced that it was suspending the trading of silver and would only accept liquidation orders. The Chairman of the Federal Reserve at that time, Paul Volker was determined to get runaway inflation under control. He abruptly raised interest rates, which caused issues with the contract values on silver thus soaking up the excess liquidity which had helped fuel the silver boom. The price of an ounce quickly dropped to $39, and by March 14, it was down to just $21. Nevertheless, the Hunts could have made billions if they had known when to get out of the market. But alas, as the price of silver fell to $21, the brothers had future contracts obligating them to buy at upwards of $50 per ounce. On March 25, 1980, the Hunts couldnt make their $135 million margin call, and Bunker phoned his brother Herbert with three ominous words: Shut it down.
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