Silver Margin Raised

ZeroHedge reports that the CME has raised the margin requirement for silver from $5,000 to $6,500.

The price for the Silver ETF (SLV) dropped sharply this afternoon on insane volume. The ETF traded 145 million shares today. Over the summer, the daily volume was often around 5 million.

So that’s one way to halt a bubble (at least for a little while).

What’s interesting is that this is a similar strategy to what the Comex did 30 years ago to pop the Silver bubble when the Hunt Brothers tried to corner the world silver market. They’d have gotten away with it, too, if it hadn’t been for the meddling Comex.

In January 1980, Time magazine reported: “Over the past nine months they have earned an estimated $2 billion to $4 billion, and one former business associate sets the Hunts’ silver holdings at 100 million oz.”

That was a lot of money back then.

The bottom came out of the silver market on Thursday March 27, 1980, which is now known as Silver Thursday. Here’s a look at the historical performance of silver (the chart only tracks up to two years ago; that’s all I could find). I now turn it over to Wikipedia:

Background

Nelson Bunker Hunt and Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver. In 1979, the price of silver jumped from $6/oz to an all-time record high of $48.70/oz. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments). The situation for other prospective purchasers of silver was so dire that the jeweller Tiffanys took out a full page ad in the New York Times, condemning the Hunt Brothers and stating 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.

But on January 7 1980, in response to the Hunt’s accumulation, the exchange rules regarding leverage were changed, when Comex adopted ‘Silver Rule 7’ placing heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.

Silver Thursday

The Hunt brothers had invested heavily in futures contracts through several brokers, including the brokerage firm Bache Halsey Stuart Shields, later Prudential-Bache Securities and Prudential Securities. When the price of silver dropped below their minimum margin requirement, they were issued a margin call for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures. Many Government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse.

To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay Bache which, in turn, survived the ordeal. The U.S. Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache.

Aftermath

The Hunts lost over a billion dollars through this incident but the family fortunes survived. They pledged most of their assets, including their stake in Placid Oil, as collateral for the rescue loan package they obtained. However the value of their assets (mainly holdings in oil, sugar and real estate) declined steadily during the 1980s, and their estimated net wealth declined from $5 billion in 1980 to less than $1 billion in 1988.

The Hunt Brothers later become the inspiration for Mortimer and Randolph Duke in the movie Trading Places.

Posted by on November 9th, 2010 at 4:43 pm


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.