Hunts’ Downfall Set Stage For Buffett Silver Prices Have Remained Low Since Texas Brothers’ Misstep
The last time such a huge chunk of the world’s silver market came under the control of so few people, Dallas billionaires Nelson Bunker Hunt and William Herbert Hunt starred in a drama that shook the world financial markets and spelled their family’s fiscal ruin.
Investor Warren E. Buffett’s grab at the precious metal this time also has captivated the world’s markets. But his procurements appear prudent compared with the high-stakes gambit the Hunts set in motion more than 20 years ago. Their near-cornering of the precious metal briefly drove the price of silver above $50 an ounce in January 1980 only to plunge below $11 an ounce during a turbulent two months.
Buffett, considered the second-wealthiest American behind software tycoon Bill Gates, announced two weeks ago that his company Berkshire Hathaway had quietly purchased almost 130 million ounces of silver since July, an investment worth more than $900 million.
In the days after Buffett’s revelation, the price of silver shot past $7 per ounce, the highest in almost a decade.
Yet that represents just one-seventh of silver’s selling price during the 1980 peak, and few expect to see those prices again any time soon. Still, Buffett’s whopping acquisition of an estimated 20 percent of the current annual silver supply evokes reminiscences of the Hunts’ misadventures.
What are the real similarities between Buffett and the Hunts? Aside from owning a lot of silver, not much, observers say.
“It’s a completely different ballgame compared to what was going on at that time,” said Bill Davis, executive vice president of Sunshine Mining and Refining Co., a Boise company that the Hunts briefly controlled in the 1970s.
The Hunts leveraged much of their purchases, controlling silver on paper without having to put up the full cost, whereas Buffett has purchased his shares in full upfront.
The Hunts staked a far larger percentage of their wealth in the silver market than Buffett, whose investment makes up 2 percent of his company’s portfolio.
The Hunts were buying during a time of high inflation - when precious metals prices historically have risen sharply - while Buffett is dealing at a time when prices are stable with no inflation.
Nelson Bunker Hunt also faced a change in commodity exchange rules that forced his family to either come up with money they didn’t have or to quickly liquidate their silver supplies. The Hunts were forced to “impale themselves on their own sword,” said Davis, who is based in Dallas.
Their big sell-off in early 1980 sent silver prices plummeting and the Hunts into bankruptcy. Nelson Bunker Hunt’s fortune fell into disarray, and he lost his renowned 2,500-acre ranch north of Fort Worth.
“I was able to wander up and watch (Nelson) Bunker Hunt’s neighbors testing his lawn chairs and pawing through his bric-a-brac,” author Larry McMurtry wrote in a Fort Worth Star-Telegram piece.
“A mere six years earlier, Nelson Bunker Hunt had stood No. 1 on all the lists of wealthy Americans, with a fortune estimated at more than $2 billion. All gone, and in only six years.”
Buffett is unlikely to encounter similar damage from his silver venture, analysts said.
“The most amount he could possibly lose if silver goes to zero is his investment,” said William Byers, director of futures research for Bear Stearns & Co. Inc. in New York.
The Hunts’ downfall essentially opened the door for Buffett’s opportunity. The market went into a downward spiral during the second half of the 1980s and early 1990s, leading to low prices and a surplus of silver.
Eyeing the bargain prices and a growing demand for the metal that has created a large silver deficit, Buffett saw a potential for substantial returns, analysts say.
As the story is told, the Hunts’ silver strategy started at the kitchen table at the Circle T Ranch. Nelson Bunker Hunt was struggling to figure out what to do with all the money he was earning from his Libyan oil fields, which produced tens of millions of dollars annually for him through the 1960s and 1970s.
He needed a place to put his cash because oil prices were low and inflation was eroding the value of the dollar. With inflation high, the price of precious metals was apt to rise as investors sought a haven for their money.
William Herbert Hunt has said he began investing in silver in 1973, when the price was $2.55 an ounce.
At the Circle T, New York commodities broker Alvin Brodsky helped sway Nelson Bunker Hunt toward silver that same year, after asking him if he believed that his silverware would increase in value in coming years because of inflation, according to “Texas Rich,” a book chronicling the Hunt dynasty.
Nelson Bunker Hunt was further drawn to silver after reading a compelling article “about how easy it was to make money in the silver market,” said Bob Guinn, a former partner in Hunt’s silver dealings.
Hunt bought silver at a dizzying pace, obtaining millions of ounces. Initially, his largest order was about 20 million ounces in 1973, with others of similar size in ensuing years. Most of his buying was done secretly, similar to Buffett’s quiet purchasing that began in July.
During the late 1970s, the Hunts owned more silver contracts than many governments.
By many estimates, the Hunts at one time controlled 110 million ounces of silver, about 20 percent of the market supply in 1980. Similarly, Buffett’s holdings represent about 20 percent of the estimated 1998 total silver supply, according to CPM Group, a precious metals and commodities research and consulting company in New York.
The Hunts’ silver control represented more than 40 percent of 1980 mine production. Buffett’s silver represents about 27 percent of the 467 million ounces expected to be mined this year, according to CPM.
Initially, the Hunts were taking “delivery” on the contracts, meaning that they had to put up millions and pay the full price.
Later they would buy contracts on “margin,” without having to pay in full upfront. That strategy would eventually seal their fate.
In 1974, word of Nelson Bunker Hunt taking delivery of silver hit the floor of the trade market and the price rose to $6 an ounce.
When silver prices hit $50 in early 1980, people emptied the family vaults of silver heirlooms, selling silverware and silver coins. Traces of silver were being recovered from film, batteries and electronics - silver’s other primary uses.
“Silver was pouring into the smelters,” Guinn said.
What further hurt the Hunts was the decision by the commodities exchange to increase the margin that silver buyers had to pay upfront for contracts, said John Lutley, a consultant to The Silver Institute in Washington, D.C.
When prices started to fall, brokerage houses called in their margins, demanding more money from the Hunts to make up for silver’s lost value.
“All of a sudden, the Hunts had to come up with significantly more money than they had,” Lutley said.
The Hunts filed one of the largest personal bankruptcies in history; Nelson Bunker Hunt’s holdings were valued at $150 million.
Since the crash, Hunt has been reclusive. Last year, he resurfaced in the news - although he wouldn’t speak to the media - with a deal to trade drilling rights in nine oil and gas fields overseas to a small Canadian company, Cass Petroleum, for 14 million shares of stock and a leadership role in the company.
Few people are worried about Buffett’s silver adventure. Many in the silver industry are hailing his arrival.
“From the standpoint of the silver industry, I’m saying, ‘God bless Warren Buffett,’ right now,” said Bill Jacobson, president of Silver Trend Mining Co. in Osburn, Idaho. “The silver market just went up a buck, and that makes things a lot rosier in the silver industry.”
Yet few are willing to predict any great price jumps reminiscent of Hunt’s glory days. Many commodities experts speculate that the top-out price will remain in the $8 to $10 range, said Byers, although he declined to predict a figure.
“Having seen silver go from $3 to $50, I’m reticent to say that anything is impossible,” he said.