The Day the Hunt Brothers Capped the Price of Gold (Part 2)

Millions of people have heard the “official” story of how the Hunt brothers drove the price of silver from under $2 an ounce to over $50 to corner the market...  

At one point, the two Texas oilmen owned the rights to more than half the world’s silver supply. But then it all came crashing down when margin requirements were inexplicably changed, and silver dropped from over $50 all the way to $11 an ounce.

Instead of making billions, two of the richest men in America ended up losing the bulk of their family’s fortune.

But before we get to that, let's look into the latest news that's shaping the world of gold and finance.

Global Leaders Convene at Davos 2024
The World Economic Forum's Annual Meeting in Davos, Switzerland, took place last week, where global leaders meet to discuss today’s pressing global issues. Unlike last year, fears of a recession are no longer top of mind, as many think the Federal Reserve will be cutting interest rate over the next year or so.

Study Finds ‘Greedflation’ Behind More Than Half of 2023 Inflation  
A recent study by the Groundwork Collaborative highlights a striking trend – over half of the inflation surge in the past year is attributed to 'greedflation,' a phenomenon where corporations leverage excessive profit-taking.

Bitcoin Price Falls 15% Following Launch of ETFs
Bitcoin has experienced a 15% decline in value over the past two weeks. This decrease followed the much-anticipated launch of Bitcoin exchange-traded funds (ETFs), prompting some investors to capitalize on the hype and exit their cryptocurrency holdings. On Tuesday, Bitcoin's price briefly fell below $39,000, the lowest since early December.

Julius Caesar's Reward – 200 Gold Coins for Every Soldier
Between 58 BC and 50 BC, Julius Caesar led a formidable campaign, defeating the Gauls across the regions now known as France, Belgium, and western Germany, through a series of pivotal and decisive battles. After the war, Ceasar paid each soldier 200 gold coins, in recognition of their valor.

What is the melting point of gold?

A. 912 degrees Celsius
B. 1,064 degrees Celsius
C. 1,794 degrees Celsius
D. 4,555 degrees Celsius

Scroll to the bottom of this email for the answer...

World Gold Council Shares Report on China’s Gold Market in 2023

In a year where China faced an uneven economic journey, gold emerged as a standout performer. This new report from the World Gold Council report details the significant improvement in China's wholesale gold demand, the remarkable global lead of local gold ETFs in inflows, and the People's Bank of China's consistent gold purchasing throughout the year.  

Get a glimpse into the intricate workings of China's gold market.

Download the Report

It began with a shoot-out at the Circle K Ranch. The 12 best marksmen would ride shotgun as the world’s largest, privately owned stockpile of silver was secretly transferred into secure vaults.

No, this wasn’t a shipment from Nevada’s Comstock Lode to San Francisco in the Wild West of the 1870s. This was the 1970s, and the precious metal was being moved from New York to Switzerland.

Shining silver under a moonlit sky, three unmarked 707s waited at LaGuardia Airport. The Circle K cowboys stood guard, shotguns in hand. 40 million ounces of bullion — amassed by Nelson Bunker and William Herbert Hunt — were loaded in, and the planes took off under cover of darkness to their secret destination…

The Day the Hunt Brothers Capped the Price of Gold, Part II

Written by: Mike Maloney

In April of 1974, oil tycoon and silver trader extraordinaire Bunker Hunt stopped in New York to visit the COMEX (Commodities Exchange) trading floor for the first time in his life. When he walked onto the floor, the normal frenzy of activity came to a crashing halt, the traders staring in amazement at the fat Texan in thick plastic glasses and a cheap blue suit. In an interview that day with Barron’s financial magazine, Bunker did not reveal the size of his silver lode, but he did reveal some of his long-term intent: ‘‘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, but something. Any damn fool can run a printing press.”

By 1976, the Hunt brothers, Bunker and Herbert, had added another 20 million ounces of silver to the 55 million they had stored in Switzerland and the United States.

By the summer of 1979, silver had risen to $8 per ounce—up from $2 an ounce when Bunker started buying in the early 1970s—and by that fall prices had doubled again to $16. With inflation and global turmoil on the rise, other buyers also were chasing silver, and on October 3, 1979, the price of silver hit $17.88.

The two major U.S. exchanges, COMEX and Chicago Board of Trade (CBOT), started to panic: the two exchanges held a measly 120 million ounces of silver between them, an amount typically delivered in a busy month. With silver prices pushing to new heights as new buyers rushed in, the exchanges became fearful that a default was imminent.

The silver rush continued to accelerate, led by the Hunts and some wealthy Saudi business partners. By this time, the Commodity Futures Trading Commission (CFTC), the government’s futures watchdog, had become seriously alarmed at the prospects of a shortage on the exchanges and tried persuading Bunker to sell some of his silver.  

Bunker resisted, believing that silver was a long-term play and that it would play an integral role in the future global economy. The CBOT, backed by the CFTC, finally decided to put a stop to the Hunts’ buying, by changing its rules. Under the new rules, margin requirements were raised, and traders could hold no more than 3 million ounces of silver futures; traders holding more than that amount would be placed in forced liquidation.

Bunker Hunt cried foul, accusing the exchange board members of having a financial interest in the markets. He stubbornly continued buying silver. The U.S. Federal Reserve and its chairman, Paul Volcker, stepped into the fray, strongly encouraging banks to stop making loans for speculative activity — a clear shot at the Hunt brothers.  

But why would the Fed take such an extreme step as to dictate who banks could loan money to? Because the Hunts’ silver trading was pushing the price of both silver and gold upward. Silver and gold, as the age-old, safe havens people turned to in times of economic crisis, were the canaries in the coal mine, their spiking prices reflecting the public’s loss of confidence in fiat currencies—including the U.S. dollar. Thus, the Fed had a vested interest in the trading of gold and silver and in keeping gold and silver prices from exploding. That’s why it stepped in to put a damper on Bunker and Herbert’s silver spree.

The Fed controls the currency supply of the United States. In 1933, in an effort to pull the United States out of the Great Depression, then-­President Franklin D. Roosevelt signed an Executive Order making it illegal for U.S. citizens to own gold. The idea was that private citizens and investors would stop hoarding gold as a hedge against inflation and a secure store of wealth, and would sell their gold back to the U.S. government, enriching its coffers and making it possible for the U.S. dollar to be redeemable in gold. When then­-President Richard Nixon took the United States off the Bretton Woods monetary system in 1971, as explained in Part I, he in effect pulled the dollar and all currencies world­wide off the Gold Exchange Standard.

After Nixon’s impeachment in the aftermath of the Watergate scandal, successor President Gerald Ford signed a bill at the end of 1974 legalizing private ownership of gold bars, coins or certificates.

By 1980, gold and silver were freely traded currencies, in competition with the U.S. dollar. The United States had been suffering through a period of stagflation, or prolonged high inflation and high unemployment throughout the 1970s. The U.S. dollar, already under siege from oil embargoes, spiking inflation, and global turmoil, was suffering heavily.

The Fed needed a way to stem the collapse of confidence in the U.S. dollar and in the U.S. economy. The billionaire Hunt brothers made a fat target.

By December 31, 1979, the price of silver was at $34.45 per ounce. The combined holdings and contracts held by Herbert and Bunker Hunt and their Saudi business partners totaled 235 million ounces. On January 7, 1980, the second major U.S. exchange, COMEX, changed its rules, limiting investors to no more than 10 million ounces in futures contracts each and requiring that any amount above that be liquidated by February 18. Publicly, the Hunts chastised the CFTC for changing the rules in the middle of the game. In private they saw the move as just another example of the U.S. government conspiracy against their family. On January 21, silver reached a record high of $50 an ounce.

On that day, the Hunt’s silver hoard was worth a mind­boggling $4.5 billion.

The Gold Connection

On the same day silver topped out at $50, gold hit a new record of $873 per ounce, as fears of inflation contagion spread like wildfire through the COMEX trading pits. That day, the COMEX, terrified that it would be forced into default, announced, with the backing of the CFTC, that trading in silver would be limited to liquidation orders only, eliminating any buyers.

Silver prices began to plummet, but when silver sneezed, gold caught the cold. Gold traders knew that if the exchanges could change the rules on silver, with the blessing of the U.S. government, they could just as easily change the rules on gold. The message was loud and clear: the U.S. government would take whatever steps were necessary to ensure that a boom in silver and gold would not threaten the credibility of the U.S. dollar.

In addition to discouraging lending to investors such as the Hunts, the Fed pulled out other weapons in its economic policy arsenal. In an attempt to curb inflation, credit expansion, and rising commodity prices, the Fed raised the Fed funds rate, their most watched interest rate, to an unbelievable 20%, further tamping down easy credit and leveraged investing.

After each successive Fed funds rate hike, the price of silver and gold continued to fall.

Even with the price of silver plummeting, Bunker Hunt remained convinced he could drive the price back up if he could only promote more buying. The Hunts continued buying. But each down day for silver was accompanied by a margin call from the Hunts’ commodities broker, asking for millions in payment to bring their accounts back up to the minimum margin. Eventually, unable to find lenders willing to buck the U.S. government and back their investments, even the billionaire Hunts ran out of cash, and their broker was forced to sell off hundreds of millions of dollars worth of Hunt silver futures.

On March 27, 1980 (Silver Thursday), silver dropped from $15.80 to $10.80 an ounce, resulting in a stock market crash fueled by rumors that the Hunts would liquidate stocks in order to cover their silver losses. Because most of their silver bullion had been purchased at under $10 an ounce, the Hunts were still ahead of the game on their physical silver. But in the futures market, where their average purchase price was near $35 an ounce, the Hunts had suffered massive losses.

When all was said and done, the Hunts were left some $1.5 billion in the hole.

The Fed, concerned with the Hunts’ massive losses and the endangerment of a major brokerage house, organized a consortium of bankers to make loans to the Hunts.  

Fed Chair Volcker oversaw arrangements as the New York banking establishment, the Hunts’ hated nemesis, issued $1.1 billion in credit, allowing the Hunts to make good on their debts.

With the Hunts’ mired in bankruptcy court, it became easy for the government to label them market manipulators, both in the court of law and in the court of public opinion. Bunker Hunt filed for personal bankruptcy and was charged with trying to corner the silver market. He settled with the IRS for $90 million and was fined an additional $10 million by the CFTC. Thanks to trusts established for him by his father, he remained a wealthy man and became a breeder of thoroughbred racehorses.

In reality, the Hunts broke no laws. The CFTC, COMEX and CBOT simply changed the rules in the middle of the game. Later investigations revealed that several members of those boards held short positions in silver, an obvious conflict of interest. But the U.S. government, eager to stop the rush to gold and silver that threatened the credibility of its own fiat currency, the dollar, had no problem choosing sides.

The lessons of this story are two­fold. First, it speaks to the importance of financial education—that quality of knowing just a little bit more than the next guy. Had the Hunts gotten out of silver futures before the tide had turned against them, they would have left the table with enormous gains. Wrongly believing they could still control the game and apparently underestimating the degree to which the deck was stacked against them, they stayed too long at the table. Awareness and understanding of wealth cycles is crucial to any investor; when the tide turns, it often turns suddenly and with crushing force, and he who tarries will be swept away.

The second lesson to take away from the Hunt brothers’ story is that most investors will do better by buying real, physical metals—not futures or other types of “paper” metals. Remember that it was the Hunts’ investments in silver futures, not the real, physical metal they had stored in their vaults, that caused their downfall. As the Hunt brothers’ story confirms for us, the rules of the game are made by the financial establishment, and the rules can be changed by that establishment at any time. If even such powerful billionaires as the Hunts were unable to overcome that reality, the ordinary investor will certainly be in over his or her head. There simply is no substitute for physical ownership of your own gold and silver.

Buy Gold or Silver Today

That’s it for this week's GoldSilver Nuggets. We'll be back next week with more gold and silver insights and updates!

Best,

Brandon S.  
GoldSilver

What is the melting point of gold?

A. 912 degrees Celsius
B. 1,064 degrees Celsius
C. 1,794 degrees Celsius
D. 4,555 degrees Celsius

Answer – B. 1,064 degrees Celsius

Gold melts at 1,064 degrees Celsius. At this temperature, gold changes from a solid to a liquid, enabling it to be molded into various shapes. That’s what makes gold perfect for crafting exquisite jewelry, and various industrial applications like electronics, aerospace, and medicine.