War on gold and Silver, playboy magazine 1980 , Brics nations hording Gold , Gold price down
108While browsing financial news online, I came across an intriguing 1980 article about the Hunt brothers and their involvement in the historic rise of silver prices to $50. The article, which I found on Playboy's website, delved into the Hunt brothers' massive accumulation of silver in the mid to late '70s, which nearly led to them cornering the market.
Starting with the purchase of 55 million ounces in late 1973 and early 1974, the Hunts continued to buy silver over the years and even went into partnership with wealthy Sheiks from Saudi Arabia. They set up a trading company called International Metals Investment Company Ltd. based in Bermuda and bought 90 million ounces of silver through the partnership.
As the price of silver spiked sharply from $8 to $16 during August and September 1979, there were fears of a squeeze on silver supplies, with commodity exchanges worried about their ability to make delivery of contracts in silver bullion when they came due. The Hunts' rationale for buying silver was due to their fear of their wealth being stolen by the printing presses after Nixon took the dollar off the gold standard, as it was now a purely fiat currency.
While the article's source may be surprising, it offers valuable insights for anyone interested in the markets.
Things start to get really interesting when we look at the parallels between the current price action in silver and the events that unfolded in 1980. According to an article, the boards of the Chicago and New York exchanges were not only composed of independent directors but also representatives of major brokerage houses. It was later revealed that nine of the 23 board members held short contracts on 38 million ounces of silver, with a combined interest of $1.88 billion in seeing the price go down. It's no surprise then that Nelson Bunker Hunt, a prominent silver investor, didn't trust them as objective regulators.
As the price of silver climbed higher, regulators started changing the rules. The Chicago Board of Trade raised the margin requirement and limited traders to 3 million ounces of futures contracts. Those with more had to sell their excess holdings by mid-February 1980. But the perceived silver shortage caused the price to soar, reaching $34.45 by the end of 1979.
On January 7, 1980, the Comex announced new position limits for futures contracts of 10 million ounces, which came into effect on February 18. However, this didn't stop the price from climbing higher, with the Hunts continuing to buy. On January 17, silver hit $50 an ounce.
Then, on January 21, the Comex announced a major rule change - trading would only be allowed for liquidation orders, with no new positions allowed. The price of silver fell sharply from $44 to $34 the next day.
Long story short, the price kept falling, and the Hunts couldn't cover their margins on the futures they had bought. The Federal Reserve had to intervene and lend them $1.1 billion to avoid a financial panic, but demanded huge collateral for the loans. Nelson Bunker Hunt eventually went bankrupt in 1988.
Fast forward to today, and silver has once again reached $50 an ounce. The exchanges have raised margin requirements, and the price has dropped by 27% in a week. There are rumors that JP Morgan holds a large short position in silver, and some speculate that they're using the margin requirement increases to squeeze long positions and pick up the pieces later.
After delving into the history of the Hunt brothers and the way futures exchanges changed the rules to hurt big players who were long, it's hard not to view the current price action in silver with a healthy dose of skepticism.
In 1980, the price of silver plummeted because the exchange wanted to hurt a large player who held a long position. Today, I believe the move is more about protecting the position of an insider who is short and in pain.
Therefore, I think it's highly likely that the price of silver will once again climb higher if those who are short use this sell-off to cover their positions. Despite the current weakness in metals during this seasonally slow period and the recent market volatility, there is still significant demand for precious metals and central banks continue to print money.
While it's possible that silver may remain flat for a few months after taking such a beating, I wouldn't be surprised to see it become a bargain in the near future