Financial Markets and Institutions (2-downloads)

The Hunt Brothers and the Silver Crash

In early 1979, two Texas billionaires, W. Herbert

Hunt and his brother, Nelson Bunker Hunt, decided

that they were going to get into the silver market in a

big way. Herbert stated his reasoning for purchasing

silver as follows: “I became convinced that the econ-

omy of the United States was in a weakening condi-

tion. This reinforced my belief that investment in

precious metals was wise ... because of rampant

inflation.” Although the Hunts’ stated reason for pur-

chasing silver was that it was a good investment, oth-

ers felt that their real motive was to establish a corner

in the silver market. Along with other associates, sev-

eral of them from the Saudi royal family, the Hunts

purchased close to 300 million ounces of silver in the

form of either actual bullion or silver futures contracts.

The result was that the price of silver rose from $6 an

ounce to over $50 an ounce by January 1980.

Once the regulators and the futures exchanges got

wind of what the Hunts were up to, they decided to

take action to eliminate the possibility of a corner by

limiting to 2,000 the number of contracts that any sin-

gle trader could hold. This limit, which was equivalent

to 10 million ounces, was only a small fraction of

what the Hunts were holding, and so they were

forced to sell. The silver market collapsed soon after-

ward, with the price of silver declining back to below

$10 an ounce. The losses to the Hunts were estimated

to be in excess of $1 billion, and they soon found

themselves in financial difficulty. They had to go into

debt to the tune of $1.1 billion, mortgaging not only

the family’s holdings in the Placid Oil Company but

also 75,000 head of cattle, a stable of thoroughbred

horses, paintings, jewelry, and even such mundane

items as irrigation pumps and lawn mowers.

Eventually both Hunt brothers were forced into declar-

ing personal bankruptcy, earning them the dubious

distinction of declaring the largest personal bankrupt-

cies ever in the United States.

Nelson and Herbert Hunt paid a heavy price for

their excursion into the silver market, but at least

Nelson retained his sense of humor. When asked

right after the collapse of the silver market how he

felt about his losses, he said, “A billion dollars isn’t

what it used to be.”

Source: THE WALL STREET JOURNAL, ”Dynasty’s Decline: The Current Question About the Hunts of Dallas: How Poor Are They?” by 

G. Christian Hill. Copyright 1984 by DOW JONES & COMPANY, INC. Reproduced with permission of DOW JONES & COMPANY, INC. via

Copyright Clearance Center.

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Chapter 24 Hedging with Financial Derivatives

601

that the trader would in effect be delivering the bonds to itself, under the exchange

rules the trader is allowed to cancel both contracts. Allowing traders to cancel their

contracts in this way lowers the cost of conducting trades in the futures market rel-

ative to the forward market in that a futures trader can avoid the costs of physical

delivery, which is not so easy with forward contracts.

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