Bunker
Hunt’s Attraction to Silver: A History of Cornering the
Silver Market By The Silver Investor's
Resource | January 7, 2011
The 1983 Hollywood comedy, Trading Places,
offered many laymen their first glimpse at the hustle-and-bustle
world of commodities trading. The film features a pair of
imperious billionaire brothers, the Dukes, who attempt to
add to their fortune by illegally manipulating the price
of orange juice in the futures market.
The protagonists, played by Dan Akroyd and
Eddie Murphy, foil the brothers’ plot and leave the
Dukes disgraced and penniless. But although the movie was
a work of fiction, the Duke characters were in fact based
on a pair of real-life brothers—Bunker and Herbert
Hunt—and their story is truly stranger than fiction.
H.L. Hunt and Heirs
He Hunt Brothers’ story begins with
their father, H.L. Hunt, who, when he died in 1974, was
the richest man in America. But despite his sons’
affinity for the precious metal, H.L. Hunt was not born
with a silver spoon in his mouth. To the contrary, H.L.
left home at sixteen and worked as a dishwasher, a mule-team
driver, a logger, a farmhand, and a construction worker,
before finally finding his true calling—poker.
By age thirty-six, poker had made H.L. Hunt
a small fortune, which he rolled into his next investment—Florida
real estate. After profiting from that boom, Hunt took the
proceeds and began drilling for oil. This is how he became
the world’s richest man—always taking bigger
and bolder risks, and routinely coming out on top —
at least in his business life. On the personal front, H.L.
had a little more than he could handle.
He had one wife in Texas and another in
Florida—at the same time, and separate families in
both states. When his first wife died, he took a third wife
with whom he had already had four children. All in all,
he had fifteen sons and daughters, many of who went on to
become moguls in their own right. Bunker and Herbert were
chief among them.
From Failure to Extreme Wealth
Nelson Bunker Hunt (who went by “Bunker”)
was born in 1926, the second-eldest son of H.L. and his
first wife, Lyda. Their eldest son, Hassie, had a mental
condition that ultimately led to a full-frontal lobotomy,
but prior to that, Hassie had struck out on his own in the
oil business, amassing a considerable fortune before his
twenty-fifth birthday.
With Hassie incapacitated, Bunker was the
heir apparent to his father’s fortune. He owned and
operated Penrod Drilling Company with his brothers William
Herbert (who, like his brother Nelson Bunker, also went
by his middle name) and Lamar, and Placid Oil Company with
five of his siblings. But Bunker would gain the most notoriety—and
wealth—for his individual efforts in business.
Initially, Bunker’s own ventures were
not very successful. He lost $11 million drilling in dry
holes in Pakistan, and after leasing two tracts in Libya,
he eventually had to sell a 50% stake in one of them in
order to meet cash-flow demands. By twist of fate, that
tract held the largest oilfield yet discovered in Africa,
and in 1961, Bunker surpassed his own father to become the
richest man in the world (excluding monarchs and despots).
Bunker’s Attraction to Silver
In what is widely characterized as one of
the most draconian acts in the history of the United States
government, President Franklin Delano Roosevelt signed Executive
Order 6102, “The Gold
Confiscation Act,” on April 5, 1933.
For the next forty-one years, it was illegal for U.S. citizens
to “hoard” gold. With gold, the traditional
store of wealth, out of the question, Bunker Hunt decided
to hold his oil profits in silver.
The early 1970s were a prosperous time for
Bunker. His Libyan oil leases were producing $30 million
a year, even as oil was priced at just $3 per barrel. But
nevertheless, Bunker did not like what he saw when he surveyed
the global economic landscape. Years of post-New Deal Keynesianism
was starting to catch up with the U.S., and inflation was
gaining steam. The war in Vietnam was unpopular, and people
were rioting in the streets.
Confidence in the federal government was
at an all-time low, and the Middle East—where Bunker
held so much of his wealth—was extremely volatile.
Silver was just $1.50 an ounce when Bunker
and his brother Herbert began buying it in 1970. Over the
course of the next three years, the brothers purchased approximately
200,000 ounces of the precious metal, and saw it double
in price to $3 per ounce.
Then in 1973, Moammar al-Qaddafi nationalized
Bunker’s oil fields and demanded a 51% royalty. Understandably,
Bunker was furious. He was incensed that the State Department
didn’t do more to defend his property, and he was
also angry at the major U.S. oil companies for not taking
a tougher stand against Qaddafi.
He blamed his long-time rivals, the Rockefellers,
whom he considered to be pseudo-socialists, for the loss
of his Libyan oil filed, and Bunker firmly believed that
the U.S. was on the road to serfdom. As a hedge against
what he saw as the inevitable, Bunker ramped up his silver
buying.
Silver Mania: 1974 to 1980
By 1974, Bunker and Herbert had accumulated
futures contracts for approximately fifty-five million ounces
of silver—8% of the global supply at that time. But
rather than selling the contracts to turn a profit, as most
commodity traders do, the Hunt brothers had every intention
of taking delivery of their silver—and they didn’t
intend to keep it in the U.S. either.
The conservative Hunts, who were members
of the John Birch Society, believed another government confiscation
was on the horizon, and since the feds had already taken
gold, silver would be next. Thus, Bunker and Herbert chartered
three 707 jets from Texas to Chicago and New York—in
the dead of night—and loaded them with forty million
ounces of silver to be whisked away to Switzerland for safe
keeping. The remaining fifteen million ounces stayed in
the U.S., but the Hunts would assume no greater risk.
By that spring, silver doubled again to
$6 per ounce. Rumors abounded that the brothers were attempting
to corner the market, thus sending prices higher. The Hunts
met with the Shah of Iran and the King of Saudi Arabia,
and although the Shah snubbed them and the King was eventually
assassinated, the Hunts eventually began working with a
Saudi sheik who was thought to represent his nation’s
royal family. By 1976, the brothers had accumulated another
twenty million ounces of silver, and by ’79, the price
had risen to $8 an ounce.
By this time, there was a legitimate silver
shortage. Over forty-three million ounces were purchased
through the COMEX and the CBOT, with delivery scheduled
to take place that coming fall. This caused the price to
double yet again, this time from $8 to $16 an ounce in just
two months. The COMEX and CBOT attempted to place new restrictions
on the ownership of silver, but the Hunts bought even more,
and soon the price had reached an astonishing $34.45 per
ounce!
The price of silver continued to climb.
On January 17, 1980, it hit $50 an ounce. At that time,
the Hunts held $4.5 billion in silver—a $3.5 billion
gain on their $1 billion investment. The various limitations
and rules changes imposed by the commodities markets had
no effect but to push the price of silver higher, until
finally the COMEX announced that it was suspending the trading
of silver and henceforth would only accept liquidation orders.
Of even greater significance, Paul Volker
had been installed as the Chairman of the Federal Reserve,
and Volker was determined to get runaway inflation under
control. The Chairman abruptly raised interest rates, thus
soaking up the excess liquidity which had helped fuel the
silver boom. The price of an ounce quickly dropped to $39,
and by March 14, it was down to just $21.
Nevertheless, the Hunts could have made
billions if they had known when to get out of the market.
But alas, as the price of silver fell to $21, the brothers
had future contracts obligating them to buy at upwards of
$50 per ounce. On March 25, 1980, the Hunts couldn’t
make their $135 million margin call, and Bunker phoned his
brother Herbert with three ominous words: “Shut it
down.”
Is Silver Manipulation Happening
Again?
Silver closed at $21.62 per ounce on Wednesday,
March 26, 1980. But the following day—the infamous
“Silver Thursday”—saw the value of the
precious metal decline by more than 50%, closing at just
$10.80. The Hunts had assets of $1.5 billion but liabilities
of $2.5 billion—making them the greatest debtors in
the history of finance (excluding governments, of course).
Ultimately, they had to be bailed out by their despised
enemies, the New York banking establishment, who issued
them $1.1 billion in credit to make good on their obligations.
In 1988, Nelson Bunker Hunt filed personal
bankruptcy and was convicted of illegally attempting to
corner the market in silver. But don’t shed a tear
for Bunker—the trusts set up for him by his father
are currently valued at more than $200 million. Bunker exited
bankruptcy in 1989, and had satisfied a $90 million debt
to the IRS by 2006. Even more so than his commodities-market
exploits, he is best known as a owner-breeder of thoroughbred
racehorses, for which he has won numerous awards.
The message of the Hunt brothers story is
a lack of financial education can be the downfall of any
silver investor—even billionaires. In many investors
opinion, it is much preferable for investors to hold silver
as bullion or, alternatively, through the indirect ownership
of silver mutual funds. Although, individual financial education
is required for success in any market.
Although it is unlikely that a pair of wealthy
brothers could corner the market in silver today, the short
ratio of silver is quite high, and upwards of 90% of these
short contracts are held by just four traders.
Precious metals are typically held as a
hedge against government mismanagement of fiat currency,
but the silver market seems poised for yet another dramatic
swing.