Silver's new tarnish could cool inflation
Jay Gould, who almost "cornered" gold in 1869 and produced a panic, would have understood the operations of billionaire brothers Nelson Bunker Hunt and W. Herbert Hunt, who created wild gyrations in the commodity and stock markets last week.
The Hunts' "corner" didn't come off either: They dropped perhaps $5 billion in paper profits and produced a near "meltdown" in the silver market. They also taught the dangers of speculative trading in the world's present inflationary recession.
Today, regulatory officials here sigh in relief. The market's safeguards held. The silver meltdown didn't occur. Conceivably, it could have produced a stock market panic, or a 1929-style market crash -- when Wall Street prices crumbled from a peak of 381 on the Dow Jones industrial average to 36; when nearly 10,000 banks closed, and a staggering worldwide liquidity squeeze followed.
Instead, the Hunt brothers' silver manipulation may have administered just the psychological shock that Carter administration economists want.
After last week's melodrama in the silver market -- the near panic was followed by quick recovery of the commodity and stock markets -- Washington officials are taking a gloomy satisfaction. Most of them now see a recession ultimately cooling current inflation. They hope the recession will be mild; they believe it may already have begun. The costly debacle of the Hunts' silver speculation may mean that further speculation in commodities, as a hedge against currency inflation, will decline and that the situation will calm.
Texas oilman Nelson Bunker Hunt, perhaps the richest man in the world, had wanted to buy gold as a hedge against inflation. But buying gold had been illegal. So he bought silver instead. He formed a syndicate with oil-rich Arab speculators and now is believed to hold 200 million ounces of silver.
The price of silver rose from about $6 an ounce early in 1979 to over $50 an ounce in January 1980. That was a nice little profit of $8 billion for the Hunts. Then the price began to slip precipitously (just as gold did for Jay Gould). A call went out for more margin from the Hunts, who had securities pledged with the big brokerage firm of Bache Halsey Stuart Shields Inc. The stunning word came that the Hunts had failed to meet $100 million in margin calls.
The Wall Street developments were not alone.
The Carter administration was trying to reassure the nation by pushing a balanced budget.
Big banks were preparing to raise interest costs again to curb inflationary borrowing. They did this Friday (March 28). The 17 percent rate of inflation, and the 19 1/2 percent cost of borrowing money are unprecedented since the Civil War. They expose the danger in the financial situation.
Here is how the news came to Wall Street. On Thursday, in an Associated Press dispatch from Paris, Nelson Hunt announced that he and his Arab and Brazilian associates would market bonds backed by $3.5 billion in silver bullion. Silver ended the day at $17.50 an ounce in London. The concept of the privately issued Hunt silver certificates startled business: Would they compete with Eurodollars?
The result was tumult. Silver plummeted, the Hunt financial empire shook, margin calls went out (margin is a down payment of a small percentage of the total purchase price), the Dow Jones industrial average was down more than 25 points at one point with enormous trading of 63.7 million shares. The Bache brokerage house, associated with Nelson Hunt, was in trouble.
Was a "panic" starting?
The crisis was over before most Americans ever realized it. By Thursday afternoon it appeared that Bache was solvent and the Hunt brothers could sustain their loss. The stock market average made an astonishing recovery and closed down only 2 points. The price of silver bounced up from $10.80 to $12 an ounce. FOOTNOTE: One speculator's loss can be another's gain. News reports indicate that Occidental Petroleum Corporation made $119 million in futures trading during that past two weeks by speculating that gold and silver would go down.