1924-1968 US government dominates world silver trade by supporting a floor price through purchases placed in stockpiles or minted coins, and by creating a ceiling by redeeming silver certificates.
1973 Herbert & Bunker Hunt buy first silver future contracts
Entered into silver as a hedge against inflation. US citizens could not own gold. Hunts did not trust US Government to prevent inflation from reducing the value of bond investments. Hunts main sources of wealth were Placid Oil and Penrod Drilling Company.
The CBOT and Comex silver commodity exchanges were anonymous and low cost.
1 January 1979 the Hunts have 37 million troy ounces of bullion and 25 million troy ounces in long futures positions, controlling $375 million of silver at prevailing prices.
They held large positions eg over 5000 contracts, traded several times each week. Most of their futures positions were in 'nearby' delivery months, and they rolled contracts into later months just before delivery dates. They took delivery of 500 contracts every few months. They did not use straddles for tax advantages.
Summer 1979 Hunts form IMIC with two Saudi partners.
The Hunts personal trading style also changed. Contracts were rolled over into much later delivery dates, and they began to use large straddles.
July 1979 International Metals Investment Corporation formed by the Hunts with Ali Bin Mussalam and Mohammed Aboud Al-Amoudi.
Began with $10 million in cash, $20 million in securities, and "$70 million that could be called upon." Arranged potential financing for trades with Merrill Lynch. IMIC purchased 500 contracts almost daily late July-early September, so that Hunts controlled 5000 futures contracts through IMIC.
Norton Waltuch of The ContiCommodity Services ", organized by "Conti Group" of (foreign) investors in the summer 1979. The Conti Group began buying futures contracts at the same as IMIC.
August 1979 IMIC held futures positions controlling 50 million troy ounces of silver.
By the end of August, the Conti Group and the Hunts control33,691 long future contracts. The Hunts, including their share of IMIC, controlled silver worth $1.3 billion. With every movement in the price of silver by $1, the Hunts gained or lost $140 million.
22 August 79 September 79 contract closed at $9.537/troy oz.
4 September 79 the Sept 79 contract closed above $11/troy oz.
18 September 79 the Sept 79 contract closed at $15.90/troy oz.
3 October 79 The Comex Board establishes the Special Silver Committee to investigate silver trading on the Comex.
22 October 79 The Silver Committee met with the Conti Group and proposed the Group reduce its Dec 79 forward position by 500 contracts per week. The Conti Group agreed to roll its positions into delivery months later than May 80.
25 October 79 The Silver Committee increased margin requirements for silver forward contracts.
Late October 79 CBOT Business Conduct Committee met with Herbert Hunt, whom promised he would not take delivery of Feb 80 contracts if the spreads were less than carrying charges.
Several large silver traders withdrew from the market with large Exchanges For Physicals, private trades that cancel future contracts. EFP's deprive the exchanges of their commissions.
Sharps, Pixley, Inc agreed to deliver to IMIC 5 million troy ounces for 1000 Comex Dec 79 contracts. Mocatta Metals agreed to exchange physical silver for 4583 contracts dated Sept 79 to Dec 79.
6 November 79 The Silver Committee interviewed Herbert Hunt who denied he was working with the Conti Group. He asserted that he had no physical silver and did not intend to take delivery.
21 November 79 Silver spot price $15.95/troy ounce
28 November 79 Bunker Hunt bought 250 Dec 79 contracts just their before delivery date.
The Silver Committee dilemma: if the increase margin in proportion to increasing volatility in order to protect contracts, they would then discourage traders from taking new positions that would reduce the volatility.
1 December 79 Silver spot price $20/troy ounce
Mid-December 79 Long positions in forward silver contracts for Feb, Mar, Apr, May 1980 exceed free stocks of silver by 3.4 X.
21 December 79 Silver spot price $24.35/troy ounce
2 January 80 Silver spot price $38.85/troy ounce
7 January 80 Comex enacts Silver Rule 7 which limits silver contracts delivery to 500 contracts per month. These rules were intended to impact the Hunts and not impact commercial trading firms.
11 January 80 Silver spot price $38.75/troy ounce
18 January 80 Silver spot price $46.80 (an increase of 646% in one year)
By mid-January 1980 The commercial short sellers faced expenses and large prospective losses not offset by their inventories of physical silver. Interest rates had increased from 10% in July 79 to 15% in January 80. "Refining fees" had increased from $0.10/troy ounce to $4.00/troy ounce. Margin requirements had not been raised since fall 79, and so many short sellers were not protecting their contracts.
Small traders had left the market, which was now dominated by the Hunts and the Condi Group.
21 January 80
Comex limits silver future trades to liquidations only, until further notice. The CBOT does the same the following day, implementing the restriction for the next two months.
22 January 80 Silver spot price closes at $34.00/troy ounce
The falling silver price forced the Hunts to commit $12/oz as original margin on their futures contracts. The Hunts and IMIC covered this with loans, adding almost $900,000,000 to the outstanding $500,000,000 already borrowed.
14 March 80
Federal Reserve issued a directive discouraging banks from lending money for commodities speculation. Hunts forced to look for loans from European banks
17 March 80 Silver spot price closes at $17.00/troy ounce
Comex did not reduce the original margin requirement as the silver price declined.
25 March 80 Silver spot price closes at $20.00/troy ounce
The variation in daily margin call can only move by $1/day, hence the Hunts' margin calls exceeded $60,000,000 per day, despite the rising prices during the previous week.
26 March 80 Silver spot price closes at $15.80/troy ounce
Bunker Hunt announces, from Paris, an agreement among bullion owners to issue silver-backed bonds. The "bullion owners" included the Hunts and members of the Conti group, suggesting collaboration between these groups. It also suggested the Hunts did not have the cast to meet their margin requirements.
27 March 80 "Silver Thursday"
Silver spot price closes at $10.40/troy ounce
Brokers for the Hunts began closing outstanding futures contracts and selling the Hunts' bullion held as collateral. Bache and possibly Merrill Lynch nearly violated their capital requirements while attempting to respond to the Hunts' situation. The Hunts used Placid Oil as collateral, eventually borrowing $1.1 billion from a syndicate of banks approved by the Federal Reserve.
Minpeco v Hunt
The Peruvian mining company Minpeco was advised by its brokers Merrill Lynch and E F Hutton to sell short in October and November 1979. The market moved against them December. In 1981 Minpeco sued Merrill Lynch, Hutton, theHunts, their brokers, Comex, and CBOT for $750,000,000.
The Hunts' attorneys adopted an "attritional" defense strategy of delay. This failed, according to Willliams (1995) due to (1) the Hunts' restrictions on their own attorneys' preparations, (2) the collapse of oil prices in 1986 from $30 to $15 per barrel reduced the Hunts' wealth, (3) disputes with IRS over the tax consequences of many of the Hunts' silver trades, (4) The Commodities Futures Trading Commission (CFTC) Division of Enforcement filed manipulation charges against the Hunts in 1985, and (5) Minpeco's financial position improved.
Minpeco's claimed that it had lost $250,000,000 due to the defendant's actions. Minpeco sought triple damages in court. The defendants' attorneys argued that the actual lost was only $150,000,000.
At this time, November 1987, the CFTC hearing on charges against the Hunts opened. An out of court settlement suggested by the Hunts' attorneys of $20,000,000. Minpeco countered with an offer of $40,000,000. The Hunts decided to go to trial, and so Minpeco v Hunt began on 24 February 1988.
The Hunts and co-defendants were
found guilty of market manipulation. The jury found for Minpeco, and awarded
$192,000,000 to them.
Extracted from Jeffrey Williams (1995) Manipulation on Trial: Economic Analysis and the Hunt Silver Case (Cambridge University Press) 244 pp. Williams presents a detailed discussion of the trial and an economic analysis of the concept of market manipulation. It is highly recommended!