Cornering the market

Discussion in 'Economics' started by justlearning, Apr 11, 2006.

  1. I have a question about how Nelson Bunker Hunt cornered the world silver in 1980 we learned about this today in class i'm a high school junior so please bear with me.

    You can read about his story here for those who are not familiar with the story.

    These two passages confuse me a bit

    "they quickly amassed more than 200 million ounces of silver, equivalent to half the world's deliverable supply. When the Hunt brothers began accumulating silver in 1973 the price was $1.95 per ounce. Early in 1979 the price was about $5, and in 1980 the price peaked at $49.45 per ounce"

    "Once the silver market was cornered, outsiders joined the chase but a combination of changed trading rules on the New York Metals Market (COMEX) and the intervention of the Federal Reserve put an end to the game. The price began to slide, culminating in a 50% one-day decline, known as Silver Thursday, on March 27, 1980 as the price plummeted from $21.62 to $10.80"

    if they originally bought silver at $5 a share and it droped to 10.80 why did they go bankrupt.

    Also how can the government implement new rules and like this and end up wiping them out is this usual for governments to do this?

    "Nelson Bunker Hunt declared bankruptcy and was convicted in 1988 for trying to corner the market in silver"

    Why is this illegal practice? If you have enough capital to really drive demand like this I dont see why something like this should be illegal
  2. They didn't just buy at $5. They were buying all the way up to the top.

    I didn't read much of the post, but that explains your question.

    I just noticed your other question. It's illegal because it is a distortion of the market. That is generally a bad thing, but it is especially with commodities, which actually serve some useful purpose for a societal end user.
  3. (1) The Hunts might have borrowed money to make additional purchases. Interest rates were a lot higher back then. That borrowing expense would have eaten them alive. (2) I don't know the exact rule but the COMEX was within its right to declare a liquidation-only market in order to "protect the integrity of the market". Keep in mind, if the exchange had done nothing, there was the potential to create a domino-effect of bankruptcies of small traders, large traders, brokerage firms, mining companies, banks and on and on. You also had a situation where the exchange could have been destroyed if too many margin calls came about all at once. (3) The CBOT did something similar with July-1990 soybeans that attracted less publicity. (4) The Hunt Brothers "bullied" a lot of commodity markets before their Silver Campaign. They finally stepped in a sinkhole with the silver.
  4. bgp


    the hunts had some saudi friends who were also buying silver. it really was not the government that stepped in but the comex exchange. they changed the rules that said nobody can buy silver only sell contracts to close. the big locals were getting squeezed to death taking the short side of hunts and saudi buying.
  5. Why were the Hunts wrong?
    You little budding capitalist! Imagine some entity is trying to corner the world supply of crude oil or somehow some ME nation would threaten the world with nuclear ambitions - so in case of a war the oil prices would quadruple. economies would collapse, people would get wiped out and we could not drive to get groceries or to work....however according to the rule of raw unbridled capitalism this would not be illegal.....
  6. bgp


    crude oil being free flowing ???? my friend what is an oil cartel ??? do you think the saudi's and oil company's are not controling the flow ????? i must have just got off the turnip truck ?? OR DID YOU !!!!

    i will not reply on this thread again!
  7. Just learning:

    I think you are asking a more general question, what is a market corner?

    What the hunts did is buy half of all the world silver to start their corner. They bought a bunch of the real commodity and stored it in some warehouse. Then they buy a ton of futures contracts on silver.

    The vast majority of futures positions (~98%) are closed before delivery. What the Hunts did is keep a ton of long positions open so every short position would have to buy the real commodity, which the Hunts happened to own the majority of and will refuse to sell it. The price has no where to go but up, the Hunts make money on the silver they own and the futures contracts they own. They continue to do this, driving the price higher and higher, until one day the exchange changes the rules on them.

    Now they are holding 1/2 the worlds silver that they paid $5/ounce for and a lot of futures contracts (possibly representing more silver than they own) that they paid $45 (a guess) for. The price is now $10.80. Any money they made on the real silver has been more than offset by the loss on the futures.

    It would also be safe to assume that any previous profits they had made on this corner were being "reinvested" in new futures contracts.

    Without government intervention the price of silver could potentially go as high as the Hunts wanted, some government intervention in markets can be a good thing.

  8. fhl


    Yes, of course, when gov't runs the economy nothing ever goes wrong. Nothing but blissful paradise. That's what soviet style economists tell us, anyway. By the way, what happenned to the soviet economy?