The Price of Silver's Rising: This Time, There Are No Scapegoats
by David Fessler, Investment U's Energy and Infrastructure Expert
Thursday, April 21, 2011
"Silver Thursday" is a day that's been in the history books for more than 31 years. For those of you too young to remember Woodstock or the Allman Brothers Band, you probably have no idea what Silver Thursday is, either.
This is a story about silver's previous meteoric rise, one that occurred in late 1979 and early 1980. Alas, it had an all-to-familiar Madoff-esque twists to it: fear, irrational exuberance and greed.
The story begins back in the early 1970s, when two brothers, Nelson Bunker and William Herbert Hunt, decided they would begin to accumulate silver.
They believed that the U.S. government was printing too much money, and thus devaluing the dollar. Sounds all too familiar, doesn't it?
The Hunts further believed that silver, like its golden cousin, would become a haven for investors, too. They wanted to invest in something that wasn't denominated in - or tied to - paper currency...
The Hunts Create A Virtual Lock on the Global Silver Market
So they started buying silver. Billions and billions of dollars worth. They took delivery of the physical metal, and used it as collateral to buy futures contracts for even more silver.
By the end of the decade, they had a virtual lock on the global silver market. Other than silver held by governments, the Hunts controlled 33 percent of all the silver in the world.
During the last year of their accumulation of the metal, prices for silver rose from about $6 an ounce in 1979 to nearly $49 an ounce just four months later. The federal government became concerned over what it viewed as a brash attempt on the part of the Hunts to control the silver market.
So Federal commodities regulators took action, creating special rules banning the writing of any more long position futures contracts, being bought or sold, for silver.
That effectively shut down the Hunts from increasing their position, and the shorts piled in like groupies at a Beatles concert. Banks soon realized the Feds were out to get the Hunt brothers, and stopped lending them money.
On March 27, 1980, now famously known as Silver Thursday, the Hunt brothers missed a $100-million margin call, and silver prices fell off a cliff. The shiny metal plummeted from its high of $48.70 an ounce to below $11 in just eight short weeks.
The Hunt brothers were:
- Subpoenaed to appear before Congress,
- Severely reprimanded,
- Charged with manipulation of the silver markets,
- Fined several times and forced into bankruptcy.
It took them nearly ten years to unwind all of their silver trades and to satisfy creditors and banks. They lost billions in the process.
Whether the Hunts intended to create a bubble in the silver market is still a subject of debate. Regardless, their actions sent a huge ripple through the nation's financial markets. Silver prices remained depressed for decades.
As Silver Prices Explode, It's Déjà Vu 1980...
Now silver prices are once again exploding, although still well below their inflation-adjusted levels during the Hunt brothers' little escapade back in 1980. What's different?
The fundamental industrial demand is still there. It increases every year, and actually comprises the majority of the metal's demand.
What is different from 1980 are the unprecedented actions by the U.S. Government and the Federal Reserve to continue their artificial respiration of the U.S. economy.
The U.S. monetary base has increased more than 200 percent in just a few years time. The country's national debt stands at over $14 trillion and climbing. Congress will shortly vote to increase it even further.
The government has no other choice but to print money to devalue the dollar in order to service its debt. So is it any wonder why silver and gold are going up?
This Time, There Are No Silver Scapegoats
This time, it isn't the Hunt brothers. It's just about everyone else, including many retail investors. They're doing it for the same reasons that occurred in the late 1970s.
- The government is devaluing the dollar.
- Its debt levels are too high, and going higher.
- Foreign countries are rethinking the idea of buying U.S.-dollar denominated securities.
- Investors are scared, and are piling into non-dollar denominated investing vehicles, like gold, silver and just about any other commodity you can name.
The chickens are coming home to roost as everyone's trying to hedge against a declining dollar. This time, the government can't point a finger at the Hunt brothers.
To find the reason gold and silver are skyrocketing, all it has to do is look in the mirror. Investors would be wise to have some exposure to commodities. As the dollar declines, they will only become more valuable in dollar terms.
Regardless of whether you choose to do it through ETFs or individual equities, there's no better time to invest in commodities than right now.
Is the U.S. dollar doomed? Over the long term, probably not. But in the short term, commodities - particularly gold and silver - are a great way to hedge against a decline in the dollar.