Revisiting the First Silver Bubble
With a new bull market in silver (SIL) now underway, I thought I’d delve back into the ancient past to the last major bubble in the white metal.
If you like gold, you absolutely have to love silver.
That’s because the white metal has a much higher beta than its yellow cousin, both of which are often found together in mountainous seams.
I remember a lunch I had with my old dear and late friend, Mike Robertson, who ran Robertson Wealth Management, one of the largest and most successful registered investment advisors in the country.
Mike was a wizened and grizzled old veteran who still remembers the last time a bubble popped for the white metal.
He was the last surviving silver broker to the Hunt Brothers, who in 1979-80 were major players in the run-up in the “poor man's gold” from $11 to a staggering $50 an ounce in a very short time.
At the peak, their aggregate position was thought to exceed an eye-popping 100 million ounces.
Nelson Bunker Hunt and William Herbert Hunt were the sons of the legendary HL Hunt, one of the original East Texas oil wildcatters, and heirs to one of the largest fortunes of the day.
Shortly after President Richard Nixon took the US off the gold standard in 1971, the two brothers became deeply concerned about the financial viability of the United States government.
To protect their assets, they began accumulating silver through coins, bars, the silver refiner, Asarco, and even antique silver tea sets.
The brothers’ interest in silver was well-known for years, and prices gradually rose. But when inflation soared into double digits during the late 1970s, a giant spotlight was thrown upon them, and the race was on.
Robertson was then a junior broker at the Houston office of Bache & Co., in which the Hunts held a minority stake, and handled a large part of their business.
The turnover in silver contracts exploded.
Mike confessed to waking up some mornings, turning on the radio to hear the silver limit up, and then not bothering to go to work because he knew there would be no trades.
The price of silver ran up so high that it became a political problem.
Several officials at the CFTC were rumored to be getting killed on their silver shorts.
Eastman Kodak (EK), whose black and white film made them one of the largest silver consumers in the country, was said to be borrowing silver from the Treasury to stay in business.
The Carter administration took a dim view of the Hunt Brothers' activities, especially considering their funding of the ultra-conservative John Birch Society.
The Feds viewed it as a conspiratorial attempt to undermine the US government. It was time to pay the piper.
Why is it that all conspiracy theories seem to originate in Texas?
The CFTC raised margin rates to 100%. The Hunts were accused of market manipulation and ordered to unwind their position.
They were subpoenaed by Congress to testify about their true motives. After a decade of litigation, Bunker received a lifetime ban from the commodities markets, a $10 million fine, and was forced into a Chapter 11 bankruptcy.
Mike saw commissions worth $14 million in today's money go unpaid.
In the end, he was only left with a Rolex watch, his broker's license, and a silver Mercedes.
He ardently believed to the very end that the Hunts got a raw deal and that their only crime was to be right about the long-term attractiveness of silver as an inflation hedge.
Nelson made one of the greatest asset allocation calls of all time and was punished severely for it.
There never was any intention to manipulate markets. As far as he knew, the Hunts never paid more than the $20 handle for silver, and that all of the buying that took it up to $50 was nothing more than retail froth.
Through the lens of 20/20 hindsight, Mike viewed the entire experience as a morality tale, a warning of what happens when you step on the toes of the wrong people, like CFTC commissioners with short positions.
What did Mike think of Silver when I spoke to him late last, only a few weeks before he died at the age of 61?
The white metal's inflation-fighting qualities are still as true as ever, and it is only a matter of time before prices once again take another long run to the upside.
Sounds like a BUY to me.
Mike, you will be missed.
RIP.
Nelson Bunker Hunt
