[313] Of the Hunt brothers

I’m tired of politics. Let’s shift some gears.

In my financial class today, again, the professor told an interesting story. This time, it was about the Hunt brothers, oil tycoons from Texas.

Back in the 70s, according to Freedom Investment, the Hunt was possibly the richest family in America. The professor in his usual confident tone said that two of the Hunt brothers decided to corner the silver market. Further search on the net revealed that they were trying to protect their asset from the rising inflation. At the time, inflation in the US was high; sometimes it was almost as high as 10%.

The Hunt tried to corner the market by buying a lot of future options, call options to be precise. For those who lack general financial knowledge, the future market is roughly a market where assets could be bought and sold at an agreed price at some future date.

Together with some help from their Arab friends, they created a silver pool and continuously gathered silver through future contracts. As time progressed, the silver pool got bigger and its supply in the public market steadily decreased. Then naturally, rumor about somebody was cornering the silver market came up but nobody did anything.

From about USD 2 per ounce, the poor’s gold price soared to more than USD 50 per ounce. Record price was USD 54. As the price was setting record, day by day, people thought that these, as the professor put it, Texas folks, would in the end sell off the silver and make a huge profit. However, that was not the case. People didn’t know that the reason the Hunt brothers’ created the pool to protect their wealth, not making profit. And thus, the silver market was continued to be pressed by, as what some would call, the rouge traders.

Industries related to silver started to feel the pain and that was enough to convince the Federal Reserve to jump in and act. The Fed with the New York Metals Market halt silver future trading and declared that no silver could be bought nor traded anymore for the time being. Just as a note, this might be an example on how free market might fail.

Immediately after the announcement, silver price crumbled from its peak price to about half in one day. Later, the price fell to about USD10. The bubble burst.

Unfortunately for the Hunt brothers, because they had accumulated almost all of the deliverable silver, they fell from grace and in the end, in the early 1980s, filed from bankruptcy. Jokingly, one of the brothers – roughly, quoting the professor – said “who cares about three billions anyway?”

Of course, that was said in a sarcastic manner.