What Happened When Three Rich Brothers Tried to Corner the Silver Market?

What would happen if a deep-pocketed investor (or, in this case, three deep-pocketed brothers) attempt to corner the market in a commodity such as silver?

Would they walk away with a massive profit, or would they be led to the brink of financial ruin?

In the early 1980s, this question was answered when three brothers - William Herbert Hunt, Lamar Hunt and Nelson Bunker Hunt - decided to try and corner the market on silver.

If they owned a massive amount of silver (via futures and physical silver) and word got out about the restricted supply, would there be a run on the commodity?

The Hunt brothers were rich from oil and gas, and they decided to try and make a massive score by taking out massive amounts of leverage to purchase silver futures and physical silver.

The Hunt brothers bought and bought and bought - all told, the brothers controlled over 100 million troy ounces of silver, as well as a large number of silver futures contracts.

When they started buying, the price of an ounce of silver was $6.08 per troy ounce - a little over a year later, the price was up to over $50/ounce.

On paper, the Hunt brothers were fabulously wealthy, though people weren't happy.

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The main flaw in the Hunt brother's plan was that they were using massive amounts of leverage to purchase their position.

Also, their position was attracting a great deal of negative attention - jewellers, for instance, were furious, even going so far as to take out ads in the New York Times.

This attracted the attention of regulators.

In early January of 1980, "Silver Rule 7" was brought in by COMEX, which heavily limited the amount of leverage that investors could use to buy commodities.

This was disastrous for the Hunt brothers, who were suddenly unable to meet their margin calls.

The price of silver quickly plunged, as there was suddenly no bid in the markets.

Panic set in, and the Hunt Brothers suddenly faced the real possibility of being wiped out.

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The situation was dire and there was concern that a number of Wall Street brokerages and banks might go down as a result.

A $1.1 billion line of credit was offered to the Hunt brothers by a number of Wall Street banks, and this helped to calm down the panic.

The Hunt Brothers had to pledge most of their assets as collateral, and they were suddenly pariahs.

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Within a few years, the price of silver was back down to just $5/ounce, as all of the unnatural buying had left the market.

By 1988, the net worth of the Hunt brothers was less than $1 billion, down over 80% from less than a decade before.

That year, the Hunt brothers lost a $134 million lawsuit filed by a company that claimed that the actions of the three brothers had significantly damaged the company.

A short time later, the Hunt brothers filed for bankruptcy.

Filed under: General Knowledge