June 2008:- Those who believe that there aren’t shenanigans in oil and other commodity markets, should examine the giant silver bubble of three decades ago.
Texas oil tycoons, Bunker and Herbert Hunt, Saudi princes and other Middle Eastern associates, drove up silver prices from around $7 an ounce in 1977 to a peak of $50 in January 1980. The consortium’s temporary corner of the silver market soon failed. By 1982 the price had crashed below $5 an ounce and remained depressed for two decades. In the end the Hunts incurred an estimated $10 billion loss and suffered the ignomy of the world’s biggest personal bankruptcy of the time.
More than two decades later traders contend that major speculators are applying virtually the same techniques as the Hunt consortium to push up oil and other commodity prices. The differences are the scale of money flows and the breadth of the speculation from energy and metals to agricultural commodities. Also pension funds, endowments and foundations have jumped on the speeding train. Since a major proportion of untransparent dealings now takes place on the over the counter market , it is difficult for regulators and other authorities to pin point the big players. Several large hedge funds have been cited. More recently the market is also focusing attention on Iran, other Middle Eastern sovereign wealth funds and Russian energy companies. So far, nothing has been confirmed.
The similarities between the Hunt silver saga and recent happenings in oil and other commodities are uncanny:
* By 1977, jewellery demand for precious metals was strong. Gold, silver and platinum were becoming increasingly popular because of inflation, a weak dollar and easier monetary conditions. Oil began to surge as the Iranian revolution got underway.
Similarly between 2002 and 2005, a weakening dollar, the Iraqi war and aftermath, loose money and low interest rates, provided the impetus for a commodities bull market.
* The stage was set for the Hunt Brothers and partners to buy silver through various brokers. In 1978, the message went around New York, London and Switzerland that silver was in an unusual bull market. Gold and platinum also became more popular.
In similar ways, speculative demand for oil, precious and base metals began to take off in 2005. Pension funds started buying energy and other commodity index products.
* By 1979, silver had soared to more than $20. Mines and other producers hedged production by selling futures to protect themselves against falling prices. The Hunt consortium bought more silver, forcing producers to cover their positions, by repurchasing loss incurring futures positions. Prices surged upwards bringing in further speculators and investors who followed the market’s momentum. Prices fell back from time to time as producers hedged and bearish speculators sold short, hoping to buy back silver at a profit when prices fell. While this was happening, the Hunts and their Middle Eastern counterparts borrowed from banks and bought even more silver.
In similar circumstances oil and other commodity hedgers and bearish speculators and traders were caught in volatile markets between 2006 and 2008. The bulls waited on the edge of the ring as prices fell. They researched the extent of the sell positions. Then they gorged bearish speculators and commercial concerns that were trying to hedge against falling prices. In this way they curbed supplies, pushing up prices further.
* By late 1979 early 1980, the Hunt consortium controlled almost 300 million ounces of silver worth around $14 billion; a vast proportion of supplies. They squeezed participants who desperately needed to buy. The price jumped and eventually peaked at US$50. By now regulators were investigating the silver market and exchanges were raising minimum margin deposits.
Once again the regulators are investigating manipulation allegations and are threatening tighter controls of markets. On the New York exchange the open crude oil positions have soared from the equivilant of 750 million barrels in 2005 to 2.8 billion barrels of oil worth around $400 billion. The Bank For International Settlements estimates that the nominal value of commodity derivatives on the OTC was $9 trillion at the end of December 2007.
* The little guy thwarted the Hunts in 1980. People in long queues outside jewellery and antique stores, sold their trinkets and silverware. Supplies overwhelmed the Hunts who ran out of money to buy more. The collapse from the $50 an ounce peak was swift. For years, the Hunts were fighting legal battles and their financial troubles grew when oil tumbled. Banks lost heavily.
This time, the potential consequences are far worse because of the breadth and extent of speculation across commodity markets. Global credit contraction, coupled with high prices, are forcing the little guy to slash energy consumption. More and more money and borrowings are required to push up or maintain prices that are unsustainable in the medium and long term.
Silver, unlike gold & platinum, fails to surpass 1980 peak