How the Hunt Brothers Once Cornered the Silver Market

Hello and welcome back to Breaking the Dollar. I'm your host, Everett Millman. In this week's episode is going to focus on one of the most infamous episodes of unsuccessfully trying to corner the market in all of world history, but specifically in the precious metals industry. We're talking about the Hunt brothers. They were a famous American family that made their money in the oil business early on. And then when the family patriarch passed away, his three sons, Nelson Bunker Hunt, Herbert Hunt, and Lamar Hunt, they all got to split up the riches in the family empire. And one of the main enterprises that the Hunt brothers pursued was trying to corner the silver market in the late 1970s. And it all came to a head very quickly in 1980. This infamous story is somewhat well-known throughout the financial markets because of the kind of dramatic impact it had on how commodities are traded and how speculation still does occur in the financial markets, but who is allowed to do so really changed after the Hunt brothers incident.

Now for a little background on the family, the Hunt family was already filthy rich by the time the younger Hunt brothers decided to embark on their quest to corner the silver market. Their other brother Lamar actually was the founder and owner of the Kansas City Chiefs football team. So they were fairly well-known. They had a lot of connections to different ventures. For instance, they did speculate heavily on the soybean market in the 1970s, somewhat similar series of events to what they tried with silver, but the cornering of the silver market is really what drew everyone's attention because it was such a dramatic episode in financial history.

So it would probably be a good idea to step back and just explain very briefly what does it mean to try and corner a market? I think that's somewhat of a commonly used phrase, but what does it actually mean? And in simple terms, when you corner a market, it means that you have bought up most of the supply. You have a monopoly on the supply of something in that market, which in turn gives you a lot of power and control over prices. And in fact, you could look at it as being a purely manipulative way to influence prices. So beginning in 1973, the Hunt brothers opened up a very, very heavy position in the silver market. It is estimated that initially they had about 35 million ounces of silver, which again, back in the 1970s, this is a tremendous amount of silver.

There are conflicting stories about what the real motivations behind the Hunt brothers gambit really were. Was it purely a speculative play because they hoped to make millions upon millions of dollars doing it? Or, as the brothers were sometimes quoted as saying, did they have this true political philosophy and belief that the US dollar was going to become worthless and that physical commodities like silver were the best bet of holding their value in this post-apocalyptic kind of post-dollar world? You get basically an equal split of opinions on each side about what were the real motivations. And perhaps it was a mix of the two.

But nonetheless, they aggressively started accumulating as many ounces of silver as they could. They were buying from everyone. And in fact, they weren't just stockpiling physical silver. The Hunts were also using silver derivatives like futures contracts to further speculate on the price because that's how cornering a market works. If you control so much of the supply and you are constantly buying, that's going to drive prices higher because there is this apparent demand for whatever asset you're buying up. And that's sort of the game or the strategy behind cornering a market is that you control the price and you benefit when the price goes up. Now this has always been considered somewhat of a gray area that this is unethical or a conflict of interest or you shouldn't do it. But at the time in 1973 and in the subsequent years, there weren't hard line regulations against it. There wasn't a lot that regulators and the government could do to make the Hunt brothers stop.

At one point, as I mentioned earlier with the soybean speculation, at one point US regulators did fine the Hunt brothers half a million dollars for taking out too large of a position. But that didn't mean they had to liquidate their position. It just meant that they paid this fine and they got a slap on the wrist, a warning from the government that, hey, we don't like that you're doing this. But that was about it. That probably had some influence on the Hunt brothers going forward because they only gradually were adding to their silver stock pile throughout the rest of the '70s. Maybe they saw that the government was kind of closing in on them and so they thought that they could just slow down their purchases but maintain the same strategy in place. They were just going to try and buy up as much silver as they could. And this did have the intended effect of driving up the price of silver from one or two dollars an ounce at the time to as high as six dollars an ounce by 1979. That's a threefold increase in price just right there, right off the top. They made a ton of money on their position to begin with.

Now, the story really starts getting interesting in 1979 because throughout the '70s, a lot of global events had seemed to confirm the Hunt's suspicions about the instability of the dollar and the global financial system. There's an oil crisis going on with the Middle East. There's a lot of global tensions surrounding the fact that the dollar's status as global reserve currency has fundamentally changed throughout the 1970s because it is no longer tied to gold. And in order to rapidly increase their stockpile of silver, by 1979, the Hunt brothers had increasingly turned not only to the futures markets and derivatives, as I mentioned before, but they started doing this with a high amount of leverage. And that means they're taking out loans. They are buying silver on margin. So as hard as it is to believe that as billionaires, they would be using someone else's money to buy up assets. That is precisely what the Hunt brothers did.

Again, it may have been to try and get out ahead of regulators or to find a loophole around regulations, but in essence, it was just the most aggressive possible way to get as much silver on paper in their hands as possible. Now in many cases, though, almost every case, the Hunt brothers were taking physical delivery of their silver, which is unusual for a futures contract. Typically futures contracts are simply settled in cash. So if you bought silver futures and the price went up, you still made a profit, but you just cashed it out. Whereas the Hunt brothers in taking physical delivery are sort of reinforcing or solidifying their cornering of the market. They are totally in control of the physical supply of silver. And it's estimated that -- it can be hard to tell because the numbers are not perfectly transparent -- but that at their peak, the Hunt brothers controlled between half and two-thirds of all of the available supply of silver on the private markets. So that excludes some official government stockpiles. But for all uses of investment purposes and industry, the Hunt brothers had, by many accounts, the majority of the silver in the world.

Now perhaps this aggressive use of futures contracts was coupled with the fact that the Hunts were taking physical delivery really was their downfall. So by 1979, they had increased their physical silver holdings from the 35 million ounces up to 42 million ounces between the two brothers, but they also had 65 million ounces, so even more silver, held in futures contracts, which means it is still not actually in their possession yet. But nonetheless, their influence over the silver price was so massive, they had such a large position, that the numbers showed for every dollar increase in the price of silver, the Hunts were making a hundred million dollars. Their wealth was growing by a hundred million dollars every time silver went up by one dollar per ounce.

And then here's the kicker, from late 1979 through early 1980, the price of silver, my friends, went from six dollars per ounce to fifty dollars per ounce. So that means it went up forty-four dollars in a span of months, which for the Hunts translates into four point four billion dollars just in profit. And that's in 1980 dollars, so when you factor an inflation that's many more billions of dollars in today's money. Now although the Hunts had so much of the silver market in their control, what this massive spike in the silver price naturally did is it drove a lot of people to start rummaging through their drawers for silver jewelry, old silver coins, and they went and they melted that stuff down. So in other words, a lot more silver suddenly was available or came to market than the normal numbers and projections would have had everyone believe. What really sank them is that this massive spike in the silver price got the attention of the government and of regulators.

So in early 1980, the CFTC, the Commodity Futures Trading Commission, which is one of the regulators who are involved in this aspect of the financial markets, they stepped in and sort of changed the rules in the middle of the game. And they not only made it harder for any speculator to get a line of credit with which to buy futures contracts, they in essence froze all new opening up of contracts. They said specifically for this market, for this commodity, you have to settle your contracts before you can open anymore. This in turn caught the attention of the banks who had been lending the Hunt brothers all of those extra billions of dollars for them to expand their position in silver. And that means margin calls.

And essentially a margin call is when if you are buying or trading things on credit, the creditor, the bank who gave you that loan, will call you up and say, hey, you've got to give us some percentage of that money. You have to give us some more collateral upfront. Otherwise we're going to call in the loan. We're going to liquidate your position. And that is what ultimately destroyed the Hunt's plan. Even though everything was going well and they had essentially done what they set out to do and cornered the market, because more than half of that position was on margin or done with credit, it meant it was money the Hunts didn't actually have to pay for the silver they were buying.

And here is the flip side of cornering a market. If you control the majority of the supply and the price action goes against you, so instead of the price of silver skyrocketing to $50 an ounce, if it starts to go down, that means that you have lost a boatload of money because you have obviously opened up positions. You have bought contracts when silver was at a much higher price. And that is what brought down the Hunts. Now when all of this came to a peak in 1980 and the price of silver began to fall, the Hunts really had no recourse. Even with their family fortune and the profits on paper they had made in the years prior off of the silver price going up, they had gotten so over-leveraged that when the margin calls came in and they could not make them, they had to tell the banks, we literally cannot pay you right now. That starts a cascade of events and it triggers bankruptcy proceedings, which are always a court matter. It also meant that the Hunts really could not easily get out of the bind that they were in because they had so much of their money invested in silver that as the price is falling, you really can't recoup your position because you're going to be selling your commodity or asset for less money than you paid for it. You're going to be constantly taking losses.

Really the only solution at that point was bankruptcy. They were dragged through the court system. At one point they had to go in front of Congress for hearings about speculation and market manipulation. And in the end, although they lost basically their entire family fortune, each of the Hunt brothers was still individually a millionaire many times over, even after the bankruptcies and even after all of the bashing of their public image. It's still not bad obviously be sitting on 10 to 20 million. The story of the Hunt brothers' attempt to corner the silver market does show that although these events can pop up from time to time, even in modern times, even in the world we live in, the rules of the game have shifted so that no longer really is a private interest or a family or one company ever going to be able to pull something like this off again. The government has stepped in and made sure that that is not the case. If anyone is going to corner markets, it's going to be big banks and the government itself.

So let's now take our weekly question from the listeners. This week's question comes from Pilar in High Point, North Carolina. Pilar asks, why have I heard about there not being gold at Fort Knox? That's a juicy one that is sort of a widely circulated rumor that maybe there's actually no gold stored at Fort Knox, which if you don't know, that is the United States' bullion depository in Kentucky where we store not only all of our gold reserves, but a lot of other valuable items that have to be securely protected have been stored at Fort Knox over the years. So sometimes foreign governments will put their crown jewels or a famous document. It's just sort of a euphemism for the most secure place on earth. Now the reason that there are these rumors about there not being any gold at Fort Knox or perhaps not as much gold at Fort Knox as we think is because there is not a very transparent system for auditing that gold. They never ever let any reporters go into Fort Knox and the one time they did in the 1970s, there were no cameras allowed. And as I said, it's just not a very transparent or straightforward system of accounting.

To make it easier on themselves at Fort Knox, what they do is they have separate compartments where they store the gold. It says on a slip of paper, how many gold bars are supposed to be there. And every time they check it, they seal up the box so that you can tell, unless that seal is broken, no one should have touched that gold. It makes sense in theory, but as I said, there are these very questionable discrepancies in the US government's accounting processes for how the gold is stored, how it's tested, how often it is checked, that leads to some suspicions.

The second side of that is that there are supposed to be over 8,000 tons of gold between Fort Knox and the other depositories around the country. That's a lot of gold. And it is fairly common practice for banks or governments that hold a lot of gold to occasionally loan it out, to use that gold as collateral for loans, perhaps. So all of those swirling questions and all the secrecy behind it is why there are these rumors about they're not being gold at Fort Knox. My opinion on it is not that we can definitively prove there's nothing there or that I believe there's nothing there. It's just very much an open question. And there is no way to prove it one way or the other, so you might as well be a little bit skeptical.

So as always, thank you so much for listening. We really appreciate all the listeners out there. We hope you enjoyed today's episode. Tune in the next week's episode where I go over some of the best practices with how to store your gold and silver.