Futures are one of the most risky investment forms in the financial market. Warren Buffett once described financial derivatives as “financial weapons of mass destruction”, which reveals the high-risk and high-return nature of the futures market. Every day in the market, there are dramatic changes from poverty to wealth or from wealth to bankruptcy.
Legendary futures market stories are endless. One of the most famous and tragic cases is the event of the Hunt brothers manipulating the silver market.
The Hunt brothers, Nelson and William, come from the Hunt family, one of the top richest families in the United States.
Before introducing the extraordinary operations of the Hunt brothers, let’s first review the rise history of the Hunt family.
1. Hunt Family
The founder of the Hunt family, H.L. Hunt, the father of the Hunt brothers, was born in Illinois. When he was young, he ran a cotton plantation in Arkansas. Although H.L. Hunt had no formal education, he had an extremely keen business intuition.
During World War I, the elder Hunt accumulated initial wealth through cotton trading. During World War II, he entered the oil industry. At that time, the United States was becoming the world’s largest oil exporter, and the elder Hunt’s company grew rapidly. By 1957, Fortune magazine named him one of the eight richest tycoons in the United States.
In just one generation, the Hunt family made a magnificent transformation from an ordinary cotton farmer to a first-class oil tycoon.
During World War II, the United States quickly accumulated wealth through military supplies trading. It was during this period that the Hunt family rose strongly. After the war, the Hunt family’s oil business expanded to Libya. In 1969, after Gaddafi came to power, he nationalized all foreign-funded oil projects, and the Hunt family thus lost about 4 billion dollars.
In the 1970s, the international situation was in turmoil. Nixon announced the decoupling of the US dollar from gold, and the Bretton Woods system collapsed. In 1973, the Middle East War broke out. Arab countries stopped selling oil to the United States, triggering a sharp increase in oil prices and double-digit inflation in the United States. Against such a grand background, gold and silver became extremely popular as safe-haven assets, and their prices rose sharply. The Hunt family has always been good at seizing the opportunities of the times. Facing the continuous depreciation of the US dollar, they began to actively enter the precious metal market. At that time, US law prohibited private ownership of gold, so the Hunt brothers turned their attention to silver.
Before the United Kingdom implemented the gold standard system in 1816, silver had always been a widely used currency globally. In the United States, coins with a silver content of 90% were still in circulation until 1965. In addition to its monetary use, silver is also widely used in the electronics and photography industries. Although silver resources are relatively abundant, due to its wide range of industrial applications, the market demand for silver remains strong. Therefore, the Hunt brothers obtained huge profits by hoarding silver and driving up market prices.
2. Crazy Silver
The Hunt brothers formulated an unprecedentedly bold plan: by manipulating the global silver market, making the Hunt family the richest family in the United States and even the world.
In 1973, the Hunt brothers who inherited the family business began to execute this crazy plan. They bought a large amount of silver at low prices in the spot markets in the Middle East and the United States, and established a large number of long positions in silver futures on the futures exchanges in New York and Chicago.
At that time, the price of silver was relatively low, about $3 per ounce. The Hunt brothers took advantage of this stage to buy a large amount of silver, causing the silver price to rise to $6.7 per ounce by 1974, more than doubling.
With the Hunt brothers’ large positions in the spot and futures markets, the silver price should have continued to rise. However, the Mexican government sold its 50 million ounces of silver holdings in exchange for dollars, causing the silver price to temporarily drop to $4.
Although the Hunt family did not suffer losses, their unrealized profits also disappeared.
As a currency with a long history, there are many big players in the silver market. The Hunt family realized that it was very difficult for them to control the silver price only by relying on family wealth.
To achieve their goals, the Hunt brothers needed to find wealthy partners who were willing to take risks in the financial market.
At that time, Saudi Arabia, which had just signed a secret treaty with the United States and earned huge petrodollars from the soaring oil prices, came into the sight of the Hunt brothers.
The Hunt family had a foundation in the oil business in the Middle East and had also established a huge network of connections there. The Hunt brothers, who were rich in funds and in need of huge investments, quickly reached a cooperation with the Saudi royal family and the national currency bureau, providing strong financial support for them to manipulate the silver market.
Although the Hunt family cooperated with Saudi Arabia, the silver market did not immediately set off huge waves but experienced a relatively calm six years. During this period, although the price of gold soared, the price of silver was relatively stable. The Hunt brothers continued to buy a large amount of silver spot at low prices during this period and continuously increased their long positions in the futures market.
By 1979, the physical silver hoarded by the Hunt brothers had reached a staggering more than 200 million ounces, almost equal to the then globally recognized total circulation of silver. Due to the shortage of silver, even the famous jewelry company Tiffany had to suspend its silver jewelry business.
Under the background of continuous international turmoil and high domestic inflation, the price of gold, as a safe-haven asset, soared to $500 per ounce. At the same time, the long-neglected silver market also ushered in a moment of soaring prices, kicking off the largest tragedy in the futures market.
Before discussing how the Hunt brothers massacred the shorts in the market, we need to understand their market manipulation strategy – cornering the market.
Cornering the market is an ancient business strategy that has appeared many times in history. In the early days of the domestic financial market, financial tycoons in Shanghai were good at driving up prices by hoarding commodities.
In the futures market, cornering the market has become a classic strategy for longs to confront shorts. The Hunt brothers almost controlled all the circulating silver on the market, and almost all the spot silver was in their hands.
Shorts usually are bearish on the market and expect prices to fall. But they don’t know that the Hunt brothers have secretly acquired a large amount of spot goods. When the Hunt brothers post silver buy orders in the futures market, as long as the price is right, the shorts will be forced to take the orders.
For example, the Hunt brothers signed a contract with the shorts at a price of $10 per ounce to buy 1,000 ounces of silver. There are two ways for the shorts to fulfill the contract: one is physical delivery, that is, prepare 1,000 ounces of silver and hand it over to the Hunt brothers when the contract expires to obtain $10,000; the other is to hedge the original contract by signing another contract to buy 1,000 ounces of silver with the same expiration date to realize closing positions.
However, the shorts soon found that it was almost impossible to buy spot silver in the market because most of the silver was hoarded by the Hunt brothers. This forces the shorts to close their positions through hedging, that is, to reverse and buy silver futures. Since the Hunt brothers continuously post a large number of futures buy orders in the market, and as the market realizes that someone is hoarding silver, investors also follow suit and post buy orders at higher prices, causing the silver futures price to soar to an unattainable level in a short period of time.
The shorts who cannot make physical delivery can only accept high prices if they want to close their positions. If the silver futures price is pushed up to $20 per ounce, in order to close their positions, the shorts need to buy 1,000 ounces of silver at a price of $20 per ounce. In this way, selling at $10 and buying at $20, the shorts lose $10,000 on this 1,000-ounce contract.
As the silver price rises, the panic of the shorts intensifies. Many shorts have to turn into longs in order to close their positions, further pushing up the silver futures price. This is the tragic scene of “shorts killing shorts”.
In the summer of 1979, the Hunt brothers ended their six-year dormancy and sent a buy order of 40 million ounces of silver to the futures exchanges in New York and Chicago, doubling the silver futures price in a short period of time.
By early 1980, the Hunt brothers controlled more than 50% of the silver futures contracts on the New York Exchange and more than 70% of the contracts on the Chicago Exchange.
The silver price soared from $6 to $50 in less than half a year, an increase of more than eight times, causing many shorts to burst one after another and suffer huge losses.
The defeat of the shorts is mainly because they did not expect that someone would hoard such a huge amount of silver and could successfully implement it.
3. The Decline of a Powerful Family
For a considerable period of time, almost all the silver was controlled by the Hunt family. This transaction created the most astonishing bull market in the history of commodity trading.
The Hunt brothers’ dominance in the silver market brought them to the pinnacle of their lives. As the silver price soared, their wealth also multiplied exponentially.
There is an old Chinese saying, “Extremes meet. When things reach their peak, they begin to decline.” The Hunt family pushed the silver price to an unimaginably high level and soon faced three fatal challenges, causing them to plummet in less than a year.
The first challenge came from the surge in silver supply.
Due to the soaring silver price, many silver mines that had closed due to losses reopened, and a large amount of silver was mined.
In addition, many antique silver coins and silverware with high silver content, such as Victorian silverware from Britain and the United States and silver jewelry of Indian women, were melted down into silver ingots and flowed into the market.
The sharp increase in the supply of silver spot forced the Hunt brothers to have to purchase these newly added silver at high prices to maintain the high silver price in the market.
Purchasing this high-priced silver required a large amount of funds, which brought the second challenge: a shortage of funds.
In addition to using the family’s and the Saudi royal family’s wealth, the Hunt brothers also mortgaged all the purchased silver to banks to obtain loans. At the peak of their market control, the Hunt brothers’ debt accounted for 10% of all bank loans in the United States.
In 1979, Paul Volcker, the famous governor of the Federal Reserve, took office. To deal with the inflation rate as high as 13%, he continuously raised the benchmark interest rate, which once reached a historical high of 19%. Such a high interest rate made the Hunt brothers’ capital chain tighter and tighter.
Although the first two challenges were severe, they were both capital problems and could theoretically be solved by raising more funds. However, the third challenge was a fatal blow.
The Hunt brothers mercilessly reaped wealth from the American market by driving up the silver price. This behavior finally aroused strong public resentment.
The Commodity Futures Trading Commission of the United States, the maker of futures trading rules, took severe measures on the grounds that the Hunt brothers violated laws and rules and increased the margin for silver futures sixfold.
The direct consequence of high margin is a significant reduction in the high leverage effect obtained by the Hunt brothers through low margin. The purpose of this measure is to break the already extremely strained capital chain of the Hunt brothers.
Although the Hunt brothers tried to raise funds in various ways and even began to sell the family’s oil business to maintain their operations, their stubbornness only made the exchanges even more impatient. In order to completely cut off the Hunt brothers’ retreat, the exchange once again revised the futures trading rules: prohibiting the establishment of new silver futures contracts and only allowing existing contracts to be closed.
This means the actual closure of the silver futures market. No matter how much money the Hunt brothers raise, they cannot continue their market operations.
Facing this dimensionality reduction blow from the exchange, the Hunt brothers were helpless, and the atmosphere of originally driving up the silver price in the market also began to reverse.
By March 1980, the Hunt brothers finally could not resist the severe blow from the exchange. The silver price began to drop sharply. Banks asked them to repay huge loans, otherwise they would sell the mortgaged silver. The Hunt brothers, with exhausted resources, could only continue to sell family assets to raise funds.
Under the merciless blow of Wall Street, brokers and banks began to forcibly sell the mortgaged silver, causing the silver price to completely collapse.
On March 27, 1980, this day is known as “Silver Thursday” in the futures market. The silver price plummeted to $10.82 per ounce, almost half price.
Only six years after the old Hunt passed away, his sons almost lost their family fortune overnight due to an astonishing transaction.
Subsequently, the US government and the Federal Reserve intervened to stabilize the silver price, prevent the further spread of market panic, and coordinate financial institutions to restructure debts to avoid a possible larger financial crisis.
By 1987, the Hunt brothers declared bankruptcy. Their once glory was as short and dazzling as a shooting star, and finally ended in ashes.
The Hunt family, which controlled the global silver market and squeezed huge amounts of wealth from short traders around the world, ultimately shone only briefly. The half-year glory in exchange for seven years of dormancy disappeared in the blink of an eye.
Futures trading is essentially a zero-sum game. Behind every sudden rich person in the market, there are countless people who lose everything. The derivatives market is essentially a high-risk casino where many smart people have stumbled. Therefore, never be overly confident and try to avoid getting involved in the complex derivatives market as much as possible.
Reproduction Notes：InvestFancy » The Hunt brothers’ silver manipulation case