An Old Issue Of Playboy, And A Crap-Ton Of Silver

“For him, hoarding silver is not just his way of hedging inflation: It is also part of his attempt to create his own independent economy, his own money.”
Harry Hurt III

Dear Resource Hunter,

What if I told you, by January 2014, the price of silver is set to jump 525%.

From its current price around $28/oz, the metal will subsequently rise to $175/oz. – and yes, in less than 12 months.

You’d think I was crazy, right? Today I want to show you why history says I’m not…

“IN THE SUMMER of 1979, an invisible hand reached out from an island in the Atlantic and quietly began tightening its grip on the world’s supply of silver” Harry Hurt III penned in the September issue of Playboy in 1980.

In an article titled “Silverfinger,” Hurt wrote the tale of the Hunt brothers’ activities between the spring of 1979 and January 1980.

The Hunt family had wealth. Texas-sized, oil wealth in the billions. Continuing their father’s business, but also living in the shadow of his legacy, Nelson Bunker Hunt, along with brothers Herbert and Lamar were on a mission to grow the family’s wealth.

So in the 70’s when inflation started eating away at the family oil fortune the Hunt brothers started buying silver. Smartly, may I add, in an effort to avoid government confiscation the brothers personally transported it to a vault in Switzerland.

It was the beginning of the gutsiest, daylight heist ever witnessed – and today it can point to our next opportunity in the metals market.

Indeed, the summer of 1979 taught us an important lesson – somewhat forgot in today’s daily press – that finite resources trade in fragile markets.

Back then, Bunker Hunt, a Texas oilman along with a few rich Saudi businessmen, was able to bring the market, for one of history’s most coveted metals, to its knees.

In the 11 months following February 1979 the price of silver jumped from $8 to a high of $50 – marking a 525% rise. Take a look:

DRH_02-25-26_Chart1(Note, this is a daily chart, so the intra-day high of $50 in 1980 is subdued)

Indeed, the real-life drama that unraveled that year was better than fiction. I mean really, who would have thought a few of the world’s elite could snatch up nearly all of the marketable silver on the planet. But they did!

Here’s a timeline of events, outlined by silver trader Larry Laborde:

  • Summer of 1979: the Hunt brothers started buying silver through the International Metal Investment group along with their Saudi partners.
  • Fall of 1979: the silver price doubled from $8 to $16/oz in only two months. The COMEX and the CBOT started to panic. Many people, including the Hunts through their International Metal Investment group were taking delivery on all their contracts!
  • Late in 1979: the CBOT changed the rules and stated that no investor could hold over 3 million oz of silver contracts and the margin requirement were raised.
  • The price on the last day of 1979 was $34.45/oz. At this point Bunker and Herbert held 40 million oz in Switzerland and 90 million oz of bullion they jointly owned through International Metals.
  • January 7th 1980: the COMEX changed their rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th.
  • January 17th 1980: silver hit $50/oz, At that point in time the Hunt’s silver position was worth $4.5 billion dollars bringing their profits in silver to $3.5 billion dollars.
  • January 21st 1980: the COMEX announced that it was suspending trading in silver. They would only accept liquidation orders. Silver dropped $10/oz and stayed around $39/oz until the end of January.
  • March 14th 1980: silver was down to $21/oz.

In the months following this massive silver spike, prices pulled back, finally reaching a baseline price of $5-10/oz. Through the fiasco, the Hunt brothers lost a substantial fortune (through market losses and fines) and were treated to more than one court hearing. No jail-time though (I guess those were the good old days.)

The major question that people ask when they hear this story is: “why?” And other than the quick answer, “to make money”, there’s a deeper emotion than just greed. Indeed, the main reason why this silver grab began was fear. Here’s another telling comment that Hurt penned in Playboy’s pages:

“The government treasuries of the world used to be the ones to issue currencies backed by precious metals. Like the United States, most countries have long since ceased that practice. Bunker has been trying to revive it for himself and his silver buying partners. Hoarding silver is part of his scheme to replace paper with something of “real” value. It is his hedge against the “avalanche of evil” he fears is engulfing the world. Ironically, it was also what brought about a personal and public financial apocalypse of the first order.”

Bunker Hunt had a lot of the same fears that you and I share. He worried about his wealth, the government’s growing budget and the Fed’s propensity to print first and ask questions later. Hunt, of course, took his fear and greed to a level that only a cowboy from Texas could. Quite a show, might I add.

Besides the spectacle, though, this story acts as a great, modern day example of how currencies and the world’s finite resources commingle. Also, it’s a great example as to how hard assets can explode in value — something that could be coming down the pike, sooner than you think…

How Do You Say “History Rhyming” In Mandarin?

Indeed, history doesn’t repeat itself, but it often rhymes.

China is this generation’s version of the Hunt brothers. Only instead of having the faults and worries of a single person/family, China plays by its own rules.

You can see this in the recent espionage case – where China is accused of hacking into various American companies for the gain of their country. If any person/family/group were to hack into Coca Cola or Ford and steal information that benefits a financial negotiation or business deal, you can rest assure they’d be burned at the stake – or in today’s case, put behind bars for a long time. Who knows, maybe a one way ticket to Gitmo.

But that’s not the case with a sovereign nation, especially one as strategic as China. So far the country has denied claims that its government participated in the hacking. “It wasn’t us” they say, as they retract back into their secretive, communist shell.

So you see, this time around – whether it’s gold, silver, rare earths, copper, oil or any other of the world’s coveted resources – China is upping the ante. The Chinese don’t have to play by the rules of the U.S. sandbox, they don’t have to disclose their gold holdings or admit wrongdoing in a hacking allegation – instead, thus far, they just deny or remain quiet.

Along with upping the ante, the Chinese have another strategic advantage. The Hunt brothers corning of the silver market gave China a playbook. China knows that they can’t buy massive amounts of silver or gold on the open market and expect to take delivery. During the Hunt brothers attempt to corner the silver market the COMEX changed the rules. Limiting the amount that one person could hold and upping the margin requirements to control trading.

Likewise, the U.S. government stepped in during the bankruptcy trial. The Hunt brothers owed a lot of money – somewhere to the tune of $1.5B – so much so that a bank-backed bailout was prescribed.

Trading regulations and government involvement? Rule changes and bailouts? That’s just a few of the out-of-the-box actions that China plans to avoid. Indeed, the Chinese have history as their guide. And where the Hunt bros. fell short, China will likely succeed.

One recent example of China’s strategic nature is the 2010/2011 rare earth supply crunch. When China realized the card it held, it quickly recoiled and unveiled export quotas for rare earths, a group of specialty metals vital to modern technology. Then, after they’d made some quick cash and the outcries got louder, China retracted their quotas. They played the game and they played it well.

I don’t have to be the first to tell you that if China had a full monopoly – meaning no other locale could produce rare earths – they would have increased their grip strength and constricted the market into submission. Instead, they saw the writing on the wall, others had rare earths and it was only a matter of time before they ramped up supply – so naturally the Chinese retracted their monopoly power.

The rare earth squeeze was just a preview of what the Chinese are capable of. And the recent espionage allegations follow suit (what a way to start off the year of the snake, eh?)

Looking forward, the one market that still has the ability to be cornered, as shown 1979/1980, is the precious metals market. And just like it would have paid to hold your share of precious metals back when the Hunt bros made their run at silver, it’s even more vital today. After all, the Hunt brothers were just trying to make and protect their money, whereas China’s ambitions could be much more sinister.

As the year of the snake continues, keep your eye to the East.

Keep your boots muddy,

Matt Insley

The Daily Reckoning