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David Morgan

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…

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Silver Thursday Plus 30

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.


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