Silver Rule Seven
How the Hunt Brothers Cornered Two Hundred Million Ounces and Lost to a Rule Change
Cornering a physical commodity requires solving a two-sided equation. A buyer must accumulate enough warehouse receipts to force short sellers into a delivery squeeze while borrowing cash against the rising price of the hoard itself. In 1973, Dallas oil billionaire Nelson Bunker Hunt and his brother William Herbert Hunt—sons of wildcatter H. L. Hunt—sought a tangible hedge against paper inflation. Libya had just nationalized their oil fields, and United States law still barred private citizens from owning gold bullion. Dismissing suggestions that two private investors could dominate global bullion supplies, Bunker Hunt told reporters that anyone who believed a pair of Texans could corner the world silver market had no grasp of how vast the world actually was.
Between 1974 and 1979, the brothers set out to test that proposition on the New York Commodity Exchange (COMEX) and the Chicago Board of Trade. Instead of settling futures contracts in cash as normal speculators did, the Hunts demanded physical delivery of 5,000-ounce silver bars. They chartered Boeing 707 cargo jets with reinforced floors to fly forty million ounces of silver bullion to three private vaults outside Zurich. By mid-1979, partnering with Saudi investors through a Bermudian shell company named International Metals Investment Company, the Hunts controlled roughly 100 million ounces of physical silver and another 100 million ounces in futures contracts. Together, those holdings represented one-third of the non-communist world's deliverable supply.
As silver vaulted from $6 an ounce in January 1979 to an intraday peak of $50.35 on January 18, 1980, the brothers used their mark-to-market paper profits as collateral. They borrowed fresh bank loans to buy still more futures contracts. Their leveraged corner collided with four sequential shocks between January and March 1980:
- * Scrap supply elasticity: Drawn by fifty-dollar silver, millions of households queued outside coin dealers to melt Victorian tea sets, wedding flatware, and pre-1965 quarters. Refineries were flooded with unexpected physical metal while industrial users like Eastman Kodak and Tiffany & Co. protested shortages.
- * Margin hikes by shorts on the board: Several COMEX board members held commercial short hedges that were bleeding cash on daily margin calls. Between late 1979 and January 1980, the exchange hiked initial margin requirements per 5,000-ounce contract from $1,000 to $75,000.
- * Silver Rule 7 (liquidation-only trading): On January 21, 1980, COMEX Chairman Michel Marks announced an emergency directive known as Silver Rule 7. It barred any trader from opening new long futures positions and restricted all trading strictly to the liquidation of existing contracts.
- * The Volcker interest-rate squeeze: While Silver Rule 7 outlawed every potential buyer who might have bid prices higher, Federal Reserve Chairman Paul Volcker pushed the prime lending rate to twenty percent. That hike multiplied the Hunts' monthly interest bill on their bullion loans.
With buying outlawed and selling mandatory, the price of silver had only one direction to travel. Each dollar decline below $35 triggered automatic variation margin calls against the Hunts' leveraged futures accounts. To stay afloat, they borrowed over $800 million from commercial banks and their brokers, Bache Halsey Stuart Shields. After the close on March 25, 1980, Bache demanded $135 million in immediate cash margin. Bunker Hunt informed the brokerage from Saudi Arabia that the brothers had no more cash. On Thursday, March 27—remembered on Wall Street as Silver Thursday—Bache began dumping the Hunts' silver collateral on the open floor to save itself. Once COMEX prohibited new long buyers and raised margin requirements to seventy-five thousand dollars per contract, silver plunged from fifty dollars to ten dollars and eighty cents, forcing the Hunts to pledge their Placid Oil empire for a $1.1 billion rescue loan.