If You’re Losing, Change the Rules
By October 3, 1979, silver hit $17.88 an ounce.4 The two major U.S. exchanges, COMEX and CBOT, started to panic: They held a measly 120 million ounces of silver between them, an amount typically delivered in a busy month.5 With silver prices pushing to new heights as new buyers rushed in, the exchanges became fearful that a default (inability to deliver) was imminent.
The silver rush continued to accelerate, led by the Hunt brothers and their Saudi Arabian business partners. 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 Hunt to sell some of his silver.
The billionaire resisted, believing that silver was a long-term play with an integral role in the future global economy. The CBOT, backed by the CFTC, finally decided to put a stop to the Hunt brothers’ buying—by changing its rules.
Margin requirements were suddenly raised, and traders could hold no more than 3 million ounces of silver futures; those holding more were placed in forced liquidation. Bunker Hunt cried foul, accusing exchange board members of having a financial interest in the markets—an accusation that would later be proven true.
Then, the U.S. Federal Reserve and its chairman, Paul Volcker, added to the Hunt brothers’ troubles by strongly encouraging banks to stop making loans for speculative activity.
On January 7, 1980, the other major U.S. exchange, COMEX, changed its rules also. Investors were limited to 10 million ounces in futures contracts, and any amount above that had to be liquidated by Friday, February 18.6 On the very next trading day, Monday, January 21, as silver reached a record high of $50 an ounce, the Hunt silver hoard peaked at a mind-boggling $4.5 billion, (that’s $43.5 billion in Shadowstats CPI-adjusted 2011 dolars!)5
On the same day that silver hit $50 and silver futures topped out at $52.50, gold’s price set a new record of $850 and gold futures peaked at $892. 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.
With no new buyers, the price of silver could not go up. So this rule was basically the same as saying, “Until this rule is lifted, the price of silver will only go down.” Of course, silver began to plummet, and on that same day so did gold.
On Silver Thursday, silver dropped from $15.80 to $10.80 an ounce. The stock market also crashed, fueled by rumors that the Hunt brothers 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, it was a different story.
It became easy for the government to label the Hunt brothers as market manipulators—both in the court of law and in the easily swayed 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.7
Why were the Hunt brothers torn down? Gold and silver are the canaries in the coal mine: Their spiking prices reflected the public’s loss of confidence in fiat currencies—like the U.S. dollar. So, the government and banking establishment had a vested interest in keeping gold and silver prices from exploding.
Black Blade: Are we due for some "intervention" perhaps? Not just in silver but all commodities. The USD is caught in a death spiral. Just can't create $Trillions out of thin air without consequences. Those dollars have to go somewhere and now with foreign holders of our debt selling and funds (like PIMCO) shorting government paper (Treasuries and Bonds), what other alternative than commodities? The Euro - are you kidding me? The PIIGS have made the Euro toxic waste. The Yen? After decades of negative growth topped with a natural disaster and nuclear reactors gone critical, the Japanese won't provide much cover either. Going to be tough to cap precious metals but rest assured, powerful interests will try. I think they will fail because after several decades of using every mechanism in the arsenal to cap silver and gold prices, it is like a coiled spring ready to break loose.