Silver Thursday, the Hunt Brothers, and the collapse of a precious metal

On a single day in March of 1980, silver prices fell more than 30 percent. Now known as Silver Thursday, could the same thing happen today?

After bottoming around $27 an ounce in January of this year, the price of silver has roared up 60 percent to $43.05. The see-saw trading has me looking back on one of the worst trading days in history of silver. It’s a day so infamous it has its own name: Silver Thursday.

On a single day of trading in 1980, the price of silver plunged from $15.80 to $10.80 – a decline of more than 31 percent! Those are the sort of moves that can wipe out a brokerage or Forex account in the blink of an eye. What exactly caused Silver Thursday and are we vulnerable to such declines again?

The Causes of Silver Thursday

Convinced that the United States’ loose monetary policies were going to lead to inflation, Herbert and Nelson Hunt – the sons of a wealthy oil tycoon – were convinced paper currencies would soon give way to metals-backed paper. In particular, they thought silver was grossly undervalued, so they set about accumulating it – lots and lots of it. Throughout the 1970s, they gathered up $4.5 billion of silver in bullion and futures contracts. By some accounts, that was fully one third of the world’s entire supply of silver (excluding silver held by governments, which rarely enters the free market).

The situation was so dire that Tiffany & Co. took out an ad in the New York Times in March of 1980: “We think it is unconscionable for anyone to hoard several billion, yes billion, dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver from baby spoons to tea sets, as well as photographic film and other products” (per Time magazine).

Tiffany was responding to what – by all accounts – was one of the most violent upswings in commodities prices in history. In 1979, silver bullion prices rose from $6 an ounce to a high of $48.70 – a gain of more than 700 percent in a year.

Silver Thursday and the Hunt Brothers

Tiffany was just one of the Hunt brothers’ enemies. The U.S. government smelled a secret attempt at cornering the market in silver (though the Hunts would always deny that was their goal). On Jan. 7, 1980, commodities regulators were given the go-ahead to halt the creation of new long positions in silver futures.

Shorts started piling into the trade and the price of silver began to fall. Because the Hunts were heavily invested in silver on margin, falling prices led to a series of a margin calls in their trading account. The Hunts met these diligently through March.

With little respite from falling silver prices, though, it was inevitable that the time would come when the Hunts could no longer meet a margin call. That fateful day came on March 27, 1980 – what we now know as Silver Thursday. Rumors surfaced that morning that the Hunts had a one-billion-dollar margin call they couldn’t meet. The truth was, they had a $100 million margin call. The actual dollar amount mattered little. Full-scale panic hit the pit and commodities markets.

Failing to meet a margin call is failing to meet a margin call, and the Hunt name was besmirched. No one would lend the brothers money to meet the call, and the price of silver plunged from $15.80 to $10.80, according to 24HGold.com. Other stocks and commodities sold off, too (though they would quickly recover), as traders feared an all-out collapse of some of the country’s largest financial institutions. Silver Thursday had arrived, and the Hunt fortune would never be the same again.

Indeed, it took nearly 10 years after Silver Thursday for the Hunt brothers to unwind all their silver positions. And the price of silver hasn’t come close to touching those highs in more than three decades – until now that is.

Will we see a repeat of Silver Thursday?

As I wrote yesterday, we’re just five trading days away from beating the all-time record high price for silver set in January of 1980. If current price trends for the metal continue, we could easily see $50 silver by June.

What are the odds we’ll see a repeat of Silver Thursday? The fact is, no one knows, but we do know this: silver’s more volatile than gold. Whatever happens to the yellow metal will be amplified in the price of silver. And right now, the primary driver for both metals is the ever-growing threat of inflation.

So long as that threat continues to grow, we’ll likely see higher silver prices. No one can say they won’t be another Silver Thursday, though. If the Fed signals that it’s planning to raise interest rates or end QE2 early watch out. It might not be the end of the bull market for metals, but it could be the start of a powerful correction.

Nimble traders can make money either way. At least one investor made out big on Silver Thursday the first time around. According to 24HGold.com, Occidental Petroleum’s chairman, Armand Hammer, made $119 million shorting silver. Don’t expect to see a similar collapse anytime soon, but don’t deny that it can’t happen. It did on March 27, 1980, and that days contains lessons for us all.

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