Observing the Cautionary Tale of Silver Thursday
It’s now the evening of Good Friday. As it happens, yesterday was the 44th anniversary of Silver Thursday.
You might ask: What is or was Silver Thursday? It’s a fair question. To the best of my knowledge, nobody celebrates or honors Silver Thursday; it simply stands as a largely forgotten day of infamy on the commodity markets.
There’s a Wikipedia page devoted to Silver Thursday, and several detailed articles provide additional narrative heft, context, and exposition. Simply put, Silver Thursday made its name in the silver commodity markets on Thursday, March 27, 1980, following an attempt by the Hunt brothers – Nelson Bunker Hunt, William Herbert Hunt and Lamar Hunt – to corner the silver market. It was on Silver Thursday that a precipitous drop in silver prices triggered a sequence of baleful market ramifications. All was not lost, but there were more than a few dark moments before dawn broke.
Going Up?
This is where I insert myself into the story. No, I did not play a role in Silver Thursday. This is not Good Friday confession. When it all went down, in more ways than one, I was but a callow teenager who was far more familiar with flea markets than commodity markets. Like a lot of teenagers, I had only a dim awareness of the powerful financial forces that roiled global markets.
Still, for a short time, I shared an elevator in the early 80s with two of the Hunt brothers at a racetrack (of the equine variety), where Nelson Bunker Hunt was in attendance to watch one of his horses compete in a stakes race offering a million-dollar purse. As I vaguely recall, Nelson Bunker Hunt and I might have exchanged some perfunctory pleasantries while confined in that moving space.
I was there, at the track that day, with a fellow student to film a short documentary, and the Hunt brothers were there because they were billionaires who had massive amounts of money to invest in their hobbies.
Now that I look back on it, what an odd tableau we must have formed: two scruffy blue-collar youths hauling around absurdly large video gear and two billionaire oil barons riding together in the same elevator, having nowhere else to look but at each other.
Cornered: From Soybeans to Silver
I write now about Silver Thursday not only because of my brief brush with the Hunt brothers back in the autumn of 1980, but because I’ve been wondering lately, as others have wondered previously, whether the bitcoin market could be cornered in the same way that the silver market was cornered all those years ago.
A market is said to be cornered when someone buys up all (or most) of the available quantity of a commodity. This creates an artificial shortage, which drives up the price, allowing the manipulating protagonist to sell some of his stockpile at a higher profit.
Before the Hunt brothers endeavored to corner the silver market, they tried a similar maneuver with soybeans. I know that sounds outré, and you might assume I’m embellishing the story at this point, but I can assure you that my creative imagination isn’t quite up to the task. They really did try to corner the futures market for soybeans. That ruse didn’t go as planned, and the brothers regrouped to take their run at the silver market.
Up until he died, Nelson Bunker Hunt denied that his objective was to manipulate or corner the sliver market. Instead, he explained, he chose to invest in the precious metal as a store of value, a commodity hedge against the inflation that was ravaging the U.S. dollar.
The Hunt brothers eventually owned a huge chunk of the silver market, though historical accounts differ on the exact proportions. Most accounts estimate that the Hunt brothers claimed as much as a third of the silver market, while a few sources indicate that the Hunts bought as much as two thirds of all privately owned silver on the global market. Regardless of whether we choose to accept the former or the latter estimate, the Hunts were sharks in the silver sea. They had substantial market leverage, apparently too much, with negative repercussions for them and for others.
The Hunt family made its fortune and name in the oil industry, and the Hunt brothers weren’t without financial resources to support their commodities forays. They also enlisted the help of Saudi investors, also no strangers to generational oil wealth. As the Hunts bought more and more of the limited supply of silver available on the market, the price of the commodity rose. Silver peaked at more than $50 per ounce, as people from all social strata pawned silver coins and silverware to get a piece of the action, adding modestly to overall supply of the precious metal.
Prices remained high until the U.S. government got involved, concerned about what it perceived as an attempt to manipulate national silver reserves. Federal commodities regulators introduced rules that precluded additional long-position contracts from being executed on silver futures. At that point, the Hunts were stymied, unable to increase their silver holdings under the new regulatory regime.
Sensing vulnerability, the “shorts” struck, and the price of silver slumped. The Hunts confronted mounting margin calls, sapping their cash reserves. For a while, the brothers were able to access near-term capital from friendly banks, but the Federal Reserve then asked (perhaps demanded is more to the point) that banks cease extending loans linked to speculative activity. With the credit spigot no longer flowing, the Hunt brothers missed a margin call on Silver Thursday, and the price of silver plunged. In the process, panic spread (as it does) to other commodity and future exchanges, ultimately resulting in the largest stock-market correction of 1980.
Bitcoin: The New Silver?
That’s the past, the condensed history lesson, but what about the future? Could bitcoin, or cryptocurrency more generally, play host to similar shenanigans? Is it possible that somebody, or a cabal of somebodies, could attempt to manipulate and corner the bitcoin market. In Fortune magazine three years ago, Shawn Tully examined the Hunt brothers’ silver exploits and considered the similarities and differences between what happened then and what might happen in the bitcoin market. It’s a compelling read, and the last three paragraphs are excerpted here:
Although the Hunt silver saga and today’s Bitcoin boom differ in important respects, the market mindsets that drove both are comparable. I’ll call process the “popularity-price flywheel.” The wheel start spinning when famous investors buy an asset that offers a compelling “story.” In each case, brilliant, successful people in other fields anoint the savior that will prosper best in times of trouble––in Bitcoin’s case, the marquee endorsements came from Musk and Saylor.
The newfound popularity with this illustrious crowd pumps the price. That takeoff convinces a new bunch of investors that the earliest enthusiasts are right, and they jump in. In the case of the Hunts, it was the Saudis; for Bitcoin, the recent second wave encompasses a gilded roster of celebrities and athletes. Their entrance pushes the price still higher. The new surge makes silver or Bitcoin still more popular because it appears to support that the famous names and early follow-on crowd unearthed a great buy. That enthusiasm feeds higher prices that feed higher popularity until some unforeseen shock starts the flywheel shining backwards, so that the falling price spawns a collapse in popularity.
Many investors bet alongside the Hunts because silver was soaring. That surge in itself seemed to provide proof that it was the ultimate bulletproof store of value. In the end, it was all about momentum, not securing a harbor from coming storms. Endorsements from smart people and rising prices were a false signal in 1980 for silver, and they may be leading believers astray once again in the Bitcoin craze of 2021.
You might say, well, a lot has changed since then, and, as Tully concedes, there are notable differences between the circumstances that drove silver’s surge in the late 70s and the character and dynamics of the bitcoin phenomenon today. Still, though a few years have passed since the article was published, many reasonable observers would argue that the similarities continue to outweigh the differences.
At any rate, we don’t have to go back to 1980 to cite a more recent effort to corner a commodities market. In the 1990s, Japanese trader Yasuo Hamanaka, employed by Sumitomo Corporation, earned the sobriquet “Mr. Copper” when he reprised a few chapters from the Hunts’ unruly book in a brazen bid to manipulate the copper market. Before his comeuppance, which included an eight-year prison sentence (he served seven years before reclaiming his freedom), he controlled about five percent of the world’s annual copper supply.
Plus ça change
Hubris leads already confident people to believe that they are smarter than everybody else; it causes them to think they are blessed with entitled impunity, that they can get away with things that would land mere mortals in a world of hurt.
As we discussed in an earlier post, market manipulation is no stranger to the murky depths of cryptocurrencies. The bitcoin market has moved in jagged, recurring pattern that invites scrutiny.
We know there are such things as bitcoin “whales,” and we have seen evidence of pump-and-dump hustles, wash trading, spoofing, stop hunting, the propagation of false rumors (often via social media), and the use of concurrent buy and sell trading (by the same market actor) to create illusions of volume-based momentum. Since we’ve covered much of this ground in the earlier post, I won’t revisit the gory details.
Some bitcoin advocates say the finite nature of the market – only 21 million bitcoins (at most) will be mined, the last of which making its appearance circa 2040 – means that an inherently limited supply protects against market manipulation. In a way, I grasp the logic, at least on the supply side of the ledger, but I also see the hard ceiling as an incentive for large players to devise strategies to gradually, perhaps imperceptibly, dominate and eventually corner the market. Bitcoin has evolved into an aspirational store of value, not a currency, and that makes it analogous but not equal to gold and silver, which are tangible precious metals that have uses other than market speculation.
By the time the silver debacle ran its course, the Hunts had lost more than a billion dollars. In 1988, the Hunt brothers were held responsible on civil charges of conspiracy to corner the silver market; they were ordered to pay redress of $134 million to an aggrieved Peruvian mining company, which suffered losses amid the market mayhem. Subsequently, the brothers declared bankruptcy.
Near the end of his life, Nelson Bunker Hunt regained some of his fortune and was able to buy his way back into the horse-racing fraternity. As recounted by the New York Times in an obituary, Hunt, explaining his approach to horse racing, said: “I don’t know really know anything. I am just trying to win a few races.”
The humility, regardless of how narrowly or broadly interpreted, came too late to save him from his earlier excesses in the commodities markets. Still, the downfalls of the Hunts and “Mr. Copper” serve as cautionary tales for those who manipulate markets as well as those who get swept along unthinkingly in the frothy rapids of manufactured momentum.