After GameStop, Redditors 'Short Squeeze' Silver to Eight-Year High
After lifting GameStop shares to unbelievable heights, some Redditors on the r/wallstreetbets subreddit are setting their sights on a new commodity: silver. Retail investors raised the price of silver by up to 13% on Monday — to $30.35 per ounce — using the hashtag #silversqueeze, according to Markets Insider.
For context, this was silver's highest price since early 2013.
As of Monday, retail investors had also raised the share price of Anglo-Mexican precious metal miner Fresnillo by 18%, to $15.97 (£11.69), in addition to the price of Exchange Traded Funds (ETFs) involved in the mining of silver and precious metals. Additionally, the retail investor community bought large numbers of shares in iShares Physical Silver, Alien Metals, and WisdomTree Physical Platinum, according to Market Screener.
While we're not in a cornered silver market, history shows the signs, and in the future, we might look to space to break a "commodities fever."
After GameStop, Redditors 'short squeeze' silver to eight-year high
As was the case with the GameStop stock shorts squeeze, the "silver squeeze" is an attempt to counter hedge funds and the managers of large funds who are shorting — or betting against the value of — silver.
During the weekend of January 30, U.S. bullion broker Apmex halted the sale of silver shares due to what it described as a "dramatic shift" in demand. Apmex's Chief Executive Ken Lewis said silver demand was four times greater than average, Coinweek reports.
For exchange-traded funds (ETFs), one share generally correlates to one ounce of silver. If more people buy shares of silver ETFs, the operator of the fund must buy more physical silver in order to back the shares.
Hunt brothers attempt to corner silver market
However, this isn't silver's first time taking center-stage in a market manipulation situation. Nelson Bunker Hunt, Lamar Hunt, and William Hunt were three sons of the Texas oil billionaire Haroldson Hunt, Jr. — and in 1979, the three brothers attempted to corner the silver market by buying record quantities of the metal then holding it, according to TIME Magazine archives.
When a spectator "corners the market" in a stock or commodity, they have effectively bought up almost all available shares, which forces others who are contractually bound to sell the commodity to buy it at whatever price is asked, or else they must settle in cash.
The only way to "uncorner" the market is to find new supplies of the commodity. A major historic case happened when Jay Gould and Jim Fisk cornered the gold market in 1869, which they achieved by bribing President Grant's Assistant Treasurer, Daniel Butterfield, according to PBS. President Grant himself had to intervene to break the corner.
On January 1, 1979, the price of silver was $6.08 per troy ounce ($0.195/g), but on January 18, 1980, that price stood at a record $49.45 per troy ounce ($1.590/g), according to Macrotrends.
This was an increase of 813%.
'Silver fever' instigated as 'hedge against paper money'
The Hunt brothers held an estimated 200 million ounces of silver — two-thirds of the world's supply of silver, excluding government-held silver, according to Traders Log.
Jewelers in need of silver fell into such dire straits that on March 26, 1980, Walter Hoving, chairman of the famous jeweler Tiffany & Co., took out a full-page ad in The New York Times stating: "We think it is unconscionable for anyone to hoard several billion, yes billion, dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver from baby spoons to tea sets."
The price of silver was so high that people began selling their family silver to be melted down, and burglaries of household silver increased. Hunt attributed his interest in silver as a "hedge against paper money," a sentiment that still exists today. Nelson Hunt was on the national council of the John Birch Society.
Hunt brothers profited from loss with stock
In response to the Hunts' actions, federal commodities regulators introduced special rules that curbed long positions on silver futures contracts, and the price of silver began to fall. Over a short four-day period, the price of silver dropped more than 50%, according to Yahoo!Finance.
The Hunt brothers had invested heavily in futures contracts, primarily through the Bache Group, now Prudential Securities, and when the price of silver dropped below their minimum margin requirement on Thursday, March 27, 1980, the Hunt brothers were hit with a margin call in the amount of $100 million, according to the Yahoo!Finance report. This date has come to be called "Silver Thursday."
Unable to meet the margin call, Bache was facing a potential loss of $1.7 billion, which triggered a panic in the financial, commodities, and futures markets. This could have brought down several large Wall Street brokerage firms and banks. To save them, a consortium of U.S. banks extended a $1.1 billion line of credit to the Hunt brothers, secured by Hunt assets which included their stake in Placid Oil and holdings in oil, sugar, and real estate, The Washington Post reports.
While this kept Bache afloat the Hunt brothers had failed to disclose that they held a 6.5% stake in Bache. This caused the U.S. Securities and Exchange Commission (SEC) to launch an investigation into how the Hunt brothers managed to profit from such a major loss.
Future cornered markets could turn to asteroid mining
In all, the Hunt brothers lost more than $1 billion through their attempt to corner the silver market, with their net wealth declining from $5 billion in 1980 to less than $1 billion by 1988. That year, the Hunt brothers, except for Lamar, were found guilty of violating racketeering laws in the rigging of the world silver market, according to the UPI Archives.
They were subsequently ordered to pay $134 million in compensation to Minpeco, S.A., a Peruvian mineral company that had lost money amid the Hunts' actions.
The Hunt brothers' response to this setback was to declare bankruptcy — according to The Washington Post — in one of the largest such filings in Texas history. They then faced two class-action lawsuits filed by 17,000 silver investors. Lamar Hunt died on December 13, 2006, Nelson Hunt died on October 21, 2014; however, William Hunt is still alive. According to Forbes, the 92-year old is worth $1.6 billion.
Whether the GameStop stock squeeze saga is nearing an end, or only beginning — the lesson from history suggests market manipulation by anyone typically doesn't end well. We've yet to see a group as small as a family of investors completely corner the market on silver, but if it ever happens again, at least it's not without precedent. Who knows, perhaps one day a resource will become so scarce that we'll simply have to look at asteroid mining to break a cornered market.