Why The Richest Men Love Poor Man's Gold

Warren Buffett took a shine to silver. So did the Hunt brother oil barons...

WHY have there been two major corners of the silver market in recent history? asks Miguel Perez-Santalla at BullionVault.

In 1980, the year I started working in the marketplace, the price of silver had reached $50 per ounce, only to collapse a few days later. The Hunt brothers, two oil baron brothers with powerful financial means, were behind much of the rise in the market at that time. In a book by Stephen Fay, entitled Beyond Greed, the author writes the story of this incident. 

According to the evidence, Nelson Bunker led his brother Herbert Hunt – along with friends from the Middle East – in conspiring to make the price of silver rise by purchasing over 280 million ounces, estimated by Fay as 80% of 1979's entire global mine output, worth some $14 billion at that peak price. The Hunts made business arrangements to hide their activity under other names. They believed in the value of silver, and they desired to accumulate as much as possible and by any means. In my eyes they did so without regard of others.

Yet this was at a significant risk to them, because they were buying both the futures and physicals. So was their attempted corner unjust? After all, they were trading within the market rules of the time. But they got greedy and used any resources to extend their reach.

Once the gig was up, and it was known that the Hunts were heavily leveraged through their structured business alliances, the bankers joined forces with the commodities exchange, the Comex, and the Federal Reserve to change the rules. Once the rules were changed the calamitous collapse of the silver price and the destruction of the Hunt brother’s' corner ensued. 

Since every loser on a futures contract must be matched by a winner, Bunker Hunt was convinced that the bankers and regulators involved with ending the corner profited greatly. But whatever the truth there, the Hunts would have been much more successful had they taken their profit sooner, before the price they demanded reached levels that affected industry and the average consumer. At that point authorities get involved to correct the distortion.

Because the silver market is much smaller than the gold market, the corner is a temptation that is almost irresistible to a big player. Even if cornering the silver market is not the intent.

In the late 1990s renewed buying of physical silver ensued. It began through a large trading firm by a major investor, Warren Buffett’s Berkshire Hathaway (ticker: BRK), which accumulated nearly 130 million ounces from 1997 to early 1998. The market price rose sharply as this news broke, however it did not make the kind of price moves that would shock the public as the Hunts corner had. 

Though the quantity purchased was large, silver production had increased since 1980 and the price had not reacted to the same extent.  Additionally, the economic reality at that time was of a booming US economy, where people felt less need of silver as a safe haven investment.

In general, market participants were surprised by the price moves in silver. It did not break any records; it just broke other investor's trades. Silver moved from slightly above the $4 level to nearly a $7 price tag. Bad for industries that use silver, and because it did have an adverse effect on other investment manager’s financial positions, this price rise was brought to the attention of the authorities.

One of these investment managers was Martin Armstrong of Princeton Economics International, who apparently had been selling short the silver market. His business became unraveled by the constant buying and rising price that he did not foresee. At the request of investigators the large participants were asked to reveal their intentions. It became clear that no crime was committed unless buying silver was made illegal. But unfortunately for Mr. Armstrong he had opened a can of worms. 

In the process of the investigation it was discovered that the money he used to sell short leveraged silver futures was from an alleged Ponzi scheme, perpetrated through his company’s business. Armstrong was convicted for fraud and imprisoned for many years. He is currently a free man, and claims his innocence and that bigger fish who should have been prosecuted were left unscathed.

Did Berkshire Hathaway manipulate the silver market, or were they just investors looking for a long term stake in this hard asset? A common point given to prove the benign intent of their position was its small size compared to the rest of BRK's portfolio – only 2% of the company's entire holdings. It was said that if the price of Coca Cola shares had dropped $5 at the time, it would have been a more significant loss to them than if silver went to zero dollar value.

The point is that silver is more at risk of volatility, and attempted corners or squeezes, than its big brother gold. The principal reason is the volume of money ordinarily in the market place. Latest data from the London bullion market, where Warren Buffett took delivery of physical silver bars for Berkshire Hathaway's late 1990s' investment, says gold trading outdoes silver trading more than 9-fold by Dollar value on average. In the US Comex futures market, where the Hunt brothers got burnt having leveraged their position with borrowed money, the value of open interest – the amount of outstanding contracts – ended February 3 times greater in gold than in silver.

Liquidity is a reference to this actual market size. The more people or businesses putting more money through a market, the easier and faster it is to buy and sell larger volumes without affecting the market price. Because the silver market is so small there are participants that will take the risk that they can make a big win in this game by taking a rather large stake whether by selling it short or buying the metal.

Some win and some lose and some are big enough to cause the move. But in the end the real reason we see someone take a big shot in the silver market every so often is because they think they can make money doing it.

********

This article was first published as "Silver, Buffett & the Hunt Brothers" - and hyperlinked to:

http://goldnews.bullionvault.com/silver-buffett-hunts-032820146