Episode transcript
Hunting for Silver
This transcript has been lightly formatted from the episode captions for readability.
Silver Thursday
March 27, 1980, New York City. There's a stir on Wall Street. Something's not right. It's silver. On this single day of trading, the cash price of silver fell from $16.25 to $10.85. In a single day, that's a drop of nearly one-third. To put it in perspective, that's about the same percentage the S&P fell during the entire COVID crash from top to bottom. And the panic didn't stay in the silver market. Stocks began falling too. Oftentimes, when there's fear in one market, another market gets affected. The dominoes begin to fall. That's what made this more than just a crash in a single commodity. Someone had accumulated such an enormous position in one of the world's major precious metals and borrowed so much money to do it that when it collapsed, suddenly no one was just focused on the price of silver. Traders panicked, worried that the sudden drop could take Wall Street with it.
Rumors spread across trading desks that major brokerage firms could be in trouble. At Bache, one of the largest brokers in the country, the problem has a name. Actually, two names. Nelson Bunker Hunt. William Herbert Hunt. You're listening to Money's the Matter, a podcast about understanding money through the lenses of history, stories, and human psychology. Here's Bryan.
A crisis with two names
The brothers owed roughly $100 million that they couldn't pay. Bache began selling whatever it could. This is what's known as a liquidation or a margin call. Silver, stocks, bonds, anything pledged as collateral. And because the Hunts positions were so large, selling the silver pushed silver even lower. It made the problem even worse for them, which creates larger losses, which forces more selling. Three years after this event, a film came out. It was quite popular, starring Eddie Murphy and Dan Aykroyd, called Trading Places. Except instead of silver, the plot involved orange juice futures. The 1980s silver collapse is partially what inspired that film. The antagonist of the film? Two brothers who traded orange juice futures The Hunts weren't some reckless traders who wandered into a position they couldn't afford. They're members of one of the wealthiest families in America. Their fortunes come from Texas oil.
Somehow the family had accumulated so much silver, financed with so much borrowed money, that the inability to meet a margin call threatened to spill from a commodity market into some of the biggest financial institutions in the country. March 27th will eventually have a name. Silver Thursday.
How a hedge becomes a conviction
But the most interesting part of the story isn't the end. It's how it started. How did two wealthy men convince themselves into making such a large bet in the first place? It's easy to look backwards at a financial disaster and assume the people involved were either being foolish or greedy, but Bunker and Herbert Hunt were looking at America through the lens of the 1970s. Inflation was eating away at their purchasing power. Oil shocks were disrupting the economy. Interest rates were climbing. Confidence in government institutions had been battered by Vietnam and Watergate. The international monetary system had changed dramatically after the United States ended the dollar's convertibility into gold. If you're a wealthy person worried that paper money would continue losing value, owning something tangible wasn't the worst idea. In fact, in times of high inflation, commodities are typically a very good hedge. There's a subtle difference between a belief and a conviction. A belief can change when facts change.
A conviction can start interpreting facts as proof it should never change. So we might look back on this and say, "How could the Hunt brothers have been so wrong?" I think a better question is, what happens when you're right so many times that you're eventually convinced you're always going to be right? You don't build up confidence with one bet. You build up confidence with several right decisions. You start thinking you're a genius and you can't miss. Until you do. Let's go back a little bit.
The Hunt family
To understand the Hunts, you have to start with their father, H.L. Hunt, one of the great characters of the Texas Oil Boom. Hunt built an enormous fortune by acquiring oil interests, including East Texas oil properties, and helped make his family one of the wealthiest in the country. Among his sons were Nelson Bunker Hunt, William Herbert Hunt, and Lamar Hunt. Yes, that Lamar Hunt, the man who founded the American football league's Dallas Texans, eventually moved them to Kansas City, renamed them the Chiefs, and became one of the foundational figures in modern American professional sports. His children still own the Chiefs, and the family still operates FC Dallas, and Major League Soccer in the U.S. Lamar would become involved in the silver story too, although his role was smaller than Bunker's and Herbert's.
Buying the market
Bunker Hunt was looking at the family's wealth differently, and Oil Fortune produces dollars, but what happens if the dollars themselves become worth less? That wasn't some theoretical problem in the 1970s. The first oil shock hit in 1973. Inflation accelerated. Then came another oil shock after the Iranian Revolution. By the end of 1979, 12-month consumer inflation in the United States was around 9% and still rising, so the Hunts began buying silver. The logic was pretty straightforward. Take some wealth, denominate it in paper currency, move it into a scarce physical asset. Silver couldn't be printed by the Federal Reserve. There's a limited supply. And if inflation kept getting worse, presumably the price of silver would rise with it. So they bought some, and then they bought more. And more. Because buying silver wasn't just protecting the Hunts from inflation anymore. Eventually, the Hunts themselves became one of the most important forces determining the price of silver.
By the fall of 1979, Hunt family interests had accumulated more than 43 million ounces of physical silver. On top of that, they held futures contracts of roughly another 60 million ounces. And they weren't simply trading contracts and closing them out for profit. They were taking delivery. Actual silver was leaving the market and becoming Hunt silver. As the available supply tightened, prices rose. In January of 1979, silver had become $6 an ounce. 1980? $48.70 an ounce. Not a bad investment.
When being right becomes evidence
And imagine what it feels like from inside that trade. You believe inflation is dangerous, inflation got worse, you believe tangible assets would rise, they rose, you bought silver, silver went higher. You bought more, it went higher again. Every additional purchase confirmed the intelligence in the previous purchase. I'm really good at this, right? Other investors see what's going on and they pile in. People who own silver already, in the form of forks, coins, jewelry, sitting around their house, had determined that there's a lot more value in selling these things instead of hanging on to them and using them for their original utility. New supply starts appearing because $50 silver gives people a very strong incentive to find silver wherever they can. As demand rises, supply shrinks. The market keeps telling them that they're right. This is the hot hand fallacy. You make 10 good bets in a row, hey, I'm really good at this. The probabilities didn't change.
Just your feeling about it did. But then a realization set in, maybe a little bit too late. Is the price going up just because we're buying it? Are we driving the prices up? Are we creating, artificially, the successful trade?
Leverage changes the bet
There's another ingredient to this. The weapon of mass destruction of finance, leverage. You don't need to pay the full value of a futures contract when you open the position. You post margin. That means a relatively small amount of capital can control a large amount of silver. When silver's rising, leverage is great. The move upward produces gains on an enormous position without requiring you to put up the entire value of the positions in cash. In other words, when the position's doing well, you end up making far more money on your investment than if you had just put up the cash and bought it outright. But leverage doesn't have loyalty. When the price moves the other direction, the same mechanism works against you. Losses arrive quickly. The broker, the exchange, doesn't really care how compelling your long-term argument is. They don't care how you feel about the position. They need to close down the risk.
And that's where the Hunts started to become the risk instead of the client.
The rules change
By this time, the exchanges had their own problems. A small number of traders controlled a huge position in the market with limited supply available for delivery. The Chicago Board of Trade imposed position limits and increased margin requirements. Then COMEX followed. Or if you're from Chicago, it's the Cah-MEX. On January 7th, 1980, COMEX limited speculative positions in silver to 10 million ounces per trader. Two weeks later, January 21st, it went further. Silver trading would be liquidation only. Traders could close existing positions, but couldn't add new ones. Whether the Hunts believed these changes were fair or not, the mechanics of trade had fundamentally changed. The constant stream of buying that helped push silver higher could no longer continue in the same way. And then the price started to fall. This created a vicious cycle. The Hunts needed money to meet margin calls. To raise money, positions had to be sold. Selling silver pushed prices lower. Lower silver created larger losses.
Larger losses produced larger margin calls, requiring still more cash. And we go around the cycle again. Meanwhile, Paul Volcker's Federal Reserve was aggressively tightening monetary policy to fight the very inflation the Hunts had been worried about. Borrowing became brutally expensive.
Silver Thursday
By March, the trade was coming apart. On March 26th, silver fell to around $16. Then came March 27th. Silver dropped a $10.85. BH needed another $100 million from the Hunts. The Hunts couldn't produce it. Now the problem was no longer two billionaires had made a bad investment. Now their brokers were exposed. Bache had to make good on its customers' obligations, whether the Hunts could pay or not. In the age of billionaires, the $100 million doesn't sound like as much money. It's 2026 and we just saw our first trillionaire. That's an insane amount of money. So using CPI, $100 million in 1980 would roughly translate to $407 million today. That's just with regular inflation. A $100 million loss was enormous relative to the firm's capital. Other brokerage firms were exposed to the Hunts and other silver traders as well. Stocks began falling as traders tried to figure out who might be next.
For a few hours, the failure of one leverage commodity trade threatened to spread through the financial system. When sellers are lining up out the door and there's not many buyers, buyers have to really bring the price down in order to get rid of their positions to take the risk off the table. But we're talking about silver. Silver has served as a utility for humans for thousands of years. Some of the first coins had silver in them. Whether or not the price drops on an exchange floor in 1980 is irrelevant to the fact that silver will always have some monetary value. Eventually, the panic subsided. Silver stabilized. The broker survived. But the Hunt Brothers' great silver bet was broken.
How much did they lose?
It's tough to quantify how much the Hunts actually lost because they had physical silver. They had futures. They had loans. They had entities that were involved in silver. And different accounts quote paper losses differently. This isn't a time where we had computers and AI just to run that calculation for us. But contemporary estimates put Nelson Bunker and Herbert Hunts' paper profits at roughly two to four billion dollars. And the 1980 collapse extended their losses to about one and a half to 1.7 billion based on an estimate from the Washington Post. But that really wasn't the end of the economic loss. They continued holding quantities of silver after the crash. Financed partially by debt, by 1985, when the family sold most of its remaining 59 million ounces, the LA Times reported roughly a billion in loss on those holdings in addition to the loss in 1980. So if you're like me, you don't have a billion dollars sitting around to lose.
So you might take the cynical view and say, must be nice. Big Deal
The psychology of being right
But there's an important lesson here. And it's a trap we can all fall into, it's a million dollars, a hundred thousand dollars, 10,000 dollars, or 10 billion dollars. Know the risk you're taking. Markets don't necessarily begin with bad ideas. Sometimes they begin with great ideas and we stop asking questions. Eventually we think ourselves an expert. Like we figured something out, no one else figured out. We're a genius, right? We can't do wrong. And then you leverage on that idea. There's nothing more dangerous than vanity. Put this in the backdrop of a time where inflation was a serious problem. The dollar really had lost a ton of purchasing power. Silver rose dramatically as a result of this. The Hunts weren't imagining things. It was a calculated trade, but success changed the nature of the decision. The hedge against inflation became a massive directional bet. A massive bet became a leveraged bet.
And eventually the position became so large, the Hunts were no longer simply observing the market. Their own behavior was helping create the market they were using as evidence that their thesis was correct. That's a dangerous psychological loop. We tend to think successful investing gives us information about the investment. Sometimes it gives us information about ourselves instead. The longer something works, the harder it becomes to remember that the original outcome contained uncertainty. And once our identity becomes attached to the prediction, changing our mind doesn't feel like updating a model. It's like admitting something about ourselves, admitting you're wrong. So we search for confirming evidence. When warnings arise, we explain why we shouldn't be concerned about them. And then we add to the leverage. If we keep hitting heads a hundred times in a row, why would we ever bet on tales?
The legal aftermath
Years later, the legal aftermath would continue. The Hunts denied that they had conspired to corner the silver market, arguing that inflation, political turmoil and other forces had driven prices higher. Regulators disagreed. In 1988, a federal jury found Bunker, Herbert and Lamar Hunt and other defendants liable in a civil case involving conspiracy to corner the silver market. Bunker and Herbert subsequently sought bankruptcy protection. A massive family fortune discovered one of the oldest rules in finance. Wealth and liquidity are not the same thing.
Back to March 27, 1980
Which brings us back to New York, March 27th, 1980. Silver's falling, phones are ringing, traders are trying to determine whether one of America's largest brokerage firms has enough money to survive the afternoon. And somewhere in the center of it all are two brothers from Texas who began buying silver because they're afraid their money might lose its value. They were right about inflation. They were right about the scarce assets that could protect wealth. They were right that silver was under value, at least for a while. And maybe that's exactly why the story ended the way it did. Being wrong gives us a reason to reconsider. Being right gives us permission.
