Silver — The Poor Man’s Gold

Silver, which is often called “the poor man’s gold,” has failed to move up recently even though gold has regained a tiny bit of its luster. Last Tuesday, April 16th, spot silver got down to $22 per ounce. That was Ag’s lowest print since October 5th, 2010.

Gold now trades at 62 times silver. During the worst of the financial crisis in 2008, gold got to more than 80 times silver. The Gold/Silver ratio has been an important ratio through history. Way back in antiquity, Plato mentioned that the ratio was 12-to-1. In 1792, the U.S. Congress, at the advice of Alexander Hamilton, passed the Coinage Act of 1792. This was the government’s first attempt at price-fixing (and not the last). The act defined a U.S. dollar as 371.25 grams of silver or 24.75 grams of gold. In other words, Hamilton pegged the Gold/Silver ratio at 15. In 1834, Congress had to bump it up to 16. The all-time high for the Gold/Silver Ratio came during the first Gulf War. On February 22, 1991, gold was going for 102 times silver.

In 1979-80, there was an absolutely crazy rally in silver when two Texas brothers tried to buy all the silver in the world. What’s even crazier is that if it hadn’t been for those meddling exchanges, they would have gotten away with it.

When Nelson Bunker Hunt and Herbert Hunt started their plan, silver was around $6 per ounce. By early 1980, it got $50 per ounce. Time Magazine estimated they made between $2 billion and $4 billion in just nine months. To pull this off, they had to borrow zillions of dollars. At one point, it was estimated that they held one-third of the world’s silver. Tiffany (TIF) took out a full-page article to denounce them.

Since I’m probably the only person who knows this trivia, the Hunt brothers were the sons of the legendary oilman, Haroldson Lafayette “H.L” Hunt, Jr. Hunt the senior wrote a totally batshit-crazy novel based on his idea of a fascist utopia called “Alpaca.” It’s literally one of the worst books ever written. I remember one person calling it “1984, but Big Brother is the good guy.” I wish I were making this up.

Not all the Hunts were nuts. Lamar Hunt was one of the most influential people in the development of modern football. He was the one who came up with the name “Super Bowl.”

Anyway, back to silver. The Hunts were convinced that the Establishment was out to crush them and they were pretty much right. The exchange changed the margin requirement which forced the brothers to put up much more collateral. (By the way, one of my first jobs in this industry was making margin calls. That’s not a metaphor. I had to actually call people to tell them they had to sell or put up more money. Good times!)

On March 27, 1980, the bottom fell out of the silver market. This is now known as “Silver Thursday.” The Hunts had to put up more money, but they couldn’t reach their margin requirement. The government was worried (tell me if you’ve heard this one before) that Wall Street banks were so much in debt to the Hunts that if the Hunts went under, so would the banks. In fact, a silver panic could start a banking panic.

The Hunts had finally been broken and even today, silver is still far short of its peak in 1980. The Hunts eventually become the models for brothers Randolph and Mortimer Duke in the movie Trading Places.

Posted by on April 25th, 2013 at 8:02 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.