3 Lessons from the Biggest Silver Bust in History

The remarkable run in gold and silver prices this year has had me thinking lately -- particularly silver's run. Recently, gold's poorer cousin reached 30 year highs, with prices reaching $30 per ounce on the futures market. It reminded me of a story often told by old-school commodity pros on Wall Street. And I think there are three lessons today's investors can learn from it.

The year was 1971 and inflation was on the rise. In the past, investors had long turned to gold coins and bullion as a store of wealth and protection against inflation. There was one little problem this time: the United States had abandoned the gold standard, and it was illegal to own gold bullion.

 

But millionaire brothers Nelson Bunker Hunt and William Hunt, sons of the legendary oilman H.L. Hunt, had a plan.

In 1973, the Hunt brothers began purchasing silver futures contracts. Not satisfied to stop there, the brothers decided to hold many of the contracts to maturity and actually take delivery of the metal, an unusual tactic in a market in which virtually all positions are offset before the contracts expire.

The strategy seemed to work: between 1973 and 1979, prices had gone from $1.95 to $5 -- a gain of more than 156%.

The brothers figured if they bought enough silver, they could corner the market and make that 156% gain seem like chump change. By 1979, they had nearly succeeded. That year, prices rose to more than $50 an ounce, and the Hunt brothers were rumored to hold about one-third of the world's silver supply in storage.

But the story doesn't end there.

With prices so high, people began selling all the silver they could get their hands on. Prices plummeted 50% in four days. And the Hunt brothers had overleveraged themselves to the point that when margin calls came in, they were left holding the bag.

Later, the Commodity Futures Trading Commission changed the rules regarding margin trading and charged the Hunt brothers with manipulating the silver market. Lawsuits ensued, and the Hunt brothers were forced to pay millions in fines, back taxes and interest as a result. All told, it's estimated the brothers lost more than $1 billion in the endeavor.

I bring up this story not for your entertainment, but for an important lesson -- three to be exact. And I think it bears particular importance with regard to gold and silver's recent runs.

> When it comes to precious metals, these lessons are even more important. The gold and silver markets are notoriously volatile and can turn on a dime. And as our own David Sterman recently mentioned, a market rally is often simply the result of investors following other investors.