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Unless you are a real silver bug or a much studied gold bug, the
concept of Silver Thursday will have little meaning for you. Silver Thursday
took place on March 27, 1980, and this-coming Saturday marks the thirtieth
anniversary of that event.
Generally, the take on Silver Thursday is explained by Wikipedia as
follows:
“The Hunt brothers had invested heavily in
futures contracts through the brokerage firm Bache Halsey Stuart Shields, now Prudential-Bache 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
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.[2]
“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.”
This is the generally accepted version and basically correct, but the
story is much more involved. Most of what will be penned below is from the
book Silver Bulls, by Paul Sarnoff.
Mr. Sarnoff’s account cannot be verified as
to every detail, and my quick synopsis will hardly do this historic silver
event justice. Those who are truly interested in the “long”
version (pun intended) will have to find a copy of the book.
If we go back a bit, we can find some interesting points leading up to
this event. On January 7, 1980, the Comex board
held a meeting and adopted “Silver Rule 7,” which specified any
account with more than 100 contracts a reportable account. No individual
could carry more than 2,000 contracts, or more than 500 for any one delivery
month. “Bona fide” hedgers were, as usual, exempted from Silver Rule 7!
As Paul Sarnoff expresses on pages 81 and 82 of Silver Bulls, there was clear evidence that some of the larger
longs were apparently buying January and February up to the monthly position
limit—thus creating the possibility of a squeeze on the shorts. After
noting this, one of the board members suggested that both these months be limited
to 50 contracts per account, and thus, on January 9, 1980, Silver Rule 7 was
amended to reflect this change.
According to Sarnoff, the Hunts and their corporate allies controlled
about 192 million ounces of silver.
The Hunts were aware of the rules being manipulated and there was a
way out; it was to “simply switch their futures into physicals, hock
the physicals abroad at interest rates, which were of course tax deductions,
and shift their forward buying, if any, to the London Metal Exchange”
(page 95).
As if enough wasn’t taking place, one of the main firms that the
Hunts were doing business with needed some help to stave off a takeover bid
and thus did Bache a favor by purchasing Bache stock.
The Hunts had purchased a substantial position in Bache Halsey Stuart
Shields, over 5%, and were therefore insiders. This prevented them from
selling a substantial amount of this stock when the margin call was issued.
In other words there was no way the Hunts could use
their Bache stock to finance part of the call.
When things started to unravel on March 27, Nelson Bunker Hunt was in Europe,
announcing the idea of a silver-backed bond. The proposal was to issue a bond
in various denominations and distribute it through large European banks to
investors.
As the news spread of the silver bond proposal, the Bache $100 million
margin call, and the rumor that the Hunts might not be able to meet the
margin call, a Comex member started selling silver,
and panic hit the silver pits. The reaction was rapid—the Dow Jones
Industrial Average began tumbling, and trading was halted in Bache stock.
Bache, Merrill Lynch, and the New York Stock Exchange sent a message
to the CFTC, asking the Commission to halt trading in silver to quell the
panic. This request was denied and silver dropped about $4.00 from the
previous day to stop at $10.80.
Paul Volcker was brought in and “arrangements” were made
to solve the problems that were rippling through the financial markets.
Later, the $1.1 billion “bailout” loan caused then Senator Proxmire to hold a hearing of the Senate Banking
Committee, due to a great deal of resentment about the loan being issued.
So for some time, the Hunts accumulated their frequent flyer miles
between Dallas and D.C. As
Sarnoff notes, “It is ironical that the investigations focused only on
the actions of the silver longs rather than the silver shorts. Only in
Senator Proxmire’s hearings did inkling
emerge of the role the shorts had played in the rise and fall of the silver
price. At that hearing it became evident that the congestion in silver
happened to be not just on the long side, but even more on the short
side.”
Finally, he writes:
“Whether or not such frank journalism will lead federal agencies
to investigate the accounts and the activities of the short-sellers in
silver, who were members of the boards of directors of the involved silver
exchanges, is a moot subject.”
So, it seems we “silver bulls” have seen the investigation
into probably the most notable story about silver, played from the long side
only. As we approach the upcoming hearing with the CFTC on March 25 to
discuss position limits in gold and silver, we can keep hopes high, but
let’s also keep them realistic. Even though there are two sides to
every story, it seems the long version gets more attention from the big
players.
David Morgan
The Morgan Report
Mr. Morgan has been published in The
Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants,
Resource World, Investment Rarities, The Idaho Observer, Barron's, and The
Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review
for Kitco.
He is hosted monthly on Financial Sense with Jim Puplava.
Mr. Morgan was published in the Global
Investor regarding Ten Rules of Silver Investing, which you can receive for free. His
book Get the Skinny on Silver Investing is available on Amazon. You can subscribe to his private Internet-only newsletter, The Morgan Report, by clicking here.
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