Destruction of a Billionaire (2 of 4)

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Preface to all four parts: with all the focus on precious metals lately, I wanted to share a chapter from my Panic Prosperity and Progress book about a germane period in financial history related to the Hunts and their attempt to corner the silver market. You can read part one here.

Around this time, a radical military man named Colonel Gaddafi seized power in Libya and nationalized the country’s oil wells. Of course, Bunker’s successful operation was one of these, and the arch-conservative Bunker expected the United States to take ferocious action against this thief. The U.S. did nothing of the sort, and Armand Hammer (the interestingly-named CEO of Occidental Petroleum) agreed to give Gaddafi a 51% “royalty” in exchange for continuing operations in Libya.

Bunker was incensed at this thinly-veiled extortion payment. The Hunts had a grave distrust of many parties, including East Coast oil companies (led, they believed, by the Rockefeller clan), and Occidental’s capitulation to this lunatic Colonel was just more proof that their worldview was correct.

One by one, all the other oil companies followed suit, pledging over half their oil revenues to the Libyan government. The other oil-producing countries took note as to how successful this form of extortion was, and OPEC was formed soon thereafter, since it was clear that the oil-thirsty West could be pushed around at will.

The Accumulation Accelerates

Bunker’s suspicions about the world going to hell in a hand-basket seemed affirmed as never before by what happened in Libya, and he greatly accelerated his purchases of silver. In 1971, President Nixon destroyed the last vestige of America’s tie with gold by eliminating the convertibility of dollars into the yellow metal (at a fixed rate of $35 per ounce), and it seemed at last precious metals were going to be allowed to find their true value. In 1973 and 1974, the Hunts had acquired futures contracts to obtain 55 million ounces of silver, about 8% of the world’s entire supply.

The Hunts, however, were not executing the futures contracts the same way that 99% of the other traders. Most traders sought speculative profits based on the appreciation of the price of the paper contract during the brief lifespan of the futures paper itself. The Hunts, however, actually wanted to take possession of the physical silver, paying for it in full upon delivery. For them, the paper contracts were not a speculative tool; they were instead a vehicle to lock in the price of a commodity which they wanted to own in quantities never imagined before.

Bunker had no intention of letting this mountain of silver sit around at one of his ranches, however. He feared that Nixon or some other future President would do to silver what Roosevelt had done to gold and, at some future date, seize it. He thus sought to transport his holdings, and all future acquisitions, to safe warehouses in Switzerland where the U.S. government couldn’t get its hands on it.

One does not simply ship 55 million ounces of silver via United Parcel Service, though. Bunker chartered a fleet of 707 planes for the sole purpose of jetting the hoard of silver overseas, and he needed some serious security to ride with the jets to ensure their safe passage.

To this end, the Hunts held a shooting contest at their Circle K Range, hosting a multitude of cowboys to prove their sharpshooting skills. The dozen most proficient of them were hired as marksman to accompany the armored trucks and jets that were hired to deliver the silver to its safe Swiss destination.

The amount of silver was so vast that six different storage facilities had to be employed to house all the metal. Even though it cost three million dollars per year just to store the silver, and transporting it to Switzerland was a $200,000 expense by itself, the Hunts thought it was well worth it to get the metal out of the reach of the United States. The storage fees and transportation costs were an insurance expense, in a way. Now that the three 707s had delivered their payload, and the dozen armed cowboys had seen it safely to Zurich, the mission thus far had been accomplished.

A Rising Asset

As inflation gripped the country in the early 1970s, precious metals did indeed begin to rise in price. What had started out as a way to preserve value turned into a remarkably profitable investment for the Hunts. Silver climbed from $1.50 per ounce to $2, then $3, and, by the spring of 1974, to $6. Word was beginning to get out that Nelson Bunker Hunt was behind all the buying, and he might be trying to corner the market.

slopechart SI

Although cornering the market wasn’t his intent, Bunker definitely wanted to keep accumulating silver, and he was interested in bringing in some major partners to help him with his efforts to sweep up as much of the world’s supplies as possible and keep the price appreciating. He set his sights on the wealthiest men in the Middle East, which had in common with Bunker both the source of their wealth (oil) and the scope of their wealth (billions).

Bunker first sought to partner with the Shah of Iran, but efforts to do so seemed to be going nowhere. He then set up a meeting with King Faisal of Saudi Arabia, to be held in April of 1974. The king, however, was assassinated by none other than his own nephew just a few weeks prior to the meeting. It seemed the Hunt luck was not working in finding a Middle East partner, so he focused on other ventures.

For one, silver was not the only commodity enjoying price appreciation, and the Hunt brothers endeavored in a variety of other commodity plays to take advantage of the price inflation happening around them. They decided to target soybeans, and faced with a limit of only 3 million bushels per trader, they brought in other Hunt family members to amass a 22 million bushel portfolio.

The exchange was none too pleased at the workaround the Hunt had employed to garner a position of that size, and the CFTC filed suit against the Hunts for the violation. In the end, it didn’t really matter, because the Hunts scored a $40 million profit from their gigantic long position in soybeans.

slopechart S

Since the general investing thesis of the Hunts in the mid-1970s was that the prices of just about everything would be going higher, they spread their wealth to holdings in cattle, property, other oil concerns, sugar, and just about anything else they felt would be adversely affected by inflationary forces. As Bunker said himself, “any fool can run a printing press,” and just about anything was better to own than paper.

Another venture was far more closely aligned with their grand silver scheme. The exchanges on which they were buying silver had limits on position size, similar to what the Hunts had encountered with their soybeans trade. However, for organizations involved in the actual mining of metals, no such limits existed, because it would be inappropriate to forbid a large miner to make use of futures contracts for hedging.

Thus, the Hunts realized that if they owned a mine, they wouldn’t have to be concerned with meddling exchange regulators and the CFTC with respect to their growing silver ambitions. Thus, the Hunts sought to purchase the largest silver mine in the country, Big Creek, owned by a public firm named Sunshine Mining.

The Hunts bought 28% of the firm in the open market and secured an option to buy the rest at a later date. Not only would owning the mine allow the Hunts to acquire unlimited amounts of silver, but the mine itself was a prodigious producer of the metal, with reserves of over 30 million ounces.

Hostile Management and Friendly Arabs

Even though the Hunts had installed a hand-picked CEO, G. Michael Boswell, to run Sunshine in their behalf, they soon found themselves with a problem: Boswell and his crew refused to sell the remainder of the company at the $15/share price that had been discussed before. While the Hunts perceived the price as a ceiling, the firm’s management saw it as a floor. With the price of silver on the move higher, the assets Sunshine owned were certainly more valuable, and the old purchase price seemed insufficient to Boswell and his team.

Boswell wrote to the company’s shareholders and urged them to not sell their stock to the Hunts, and a flurry of litigation was unleashed. In the end, the Hunts were unable to complete their scheme to acquire the remainder of the firm, and they ended up selling back the 28% they did own. Their dreams of owning a silver mine were dashed, and they elected to return to more conventional methods of amassing a silver fortune.

Around this time, the Hunts received some positive responses to the fifty letters they had sent out to various sheikhs in the Middle East. A new enterprise was formed, International Metals, to consolidate the efforts of the Hunts and the likewise-wealthy participants from the Arabian participants to acquire silver at ever-increasing prices. The Hunts had a 50/50 partnership with the Saudis, and together they intended on building a war chest of cash adequate to secure 90,000,000 more ounces of silver bullion.

As rich as the Hunts were, they did not have the hundreds of millions of dollars of cash idly lying around to hold up their end of the deal, since their assets were tied up in a variety of other ventures and investments. Therefore, they attained loans from a number of large U.S. banks to fund their purchases in International Metals. In the summer of 1979, the partnership was funded and ready for action, and they swiftly accumulated futures contracts calling for delivery of 43 million ounces of silver.

slopechart SI

Throughout the 1970s, silver had more or less steadily climbed from $1.5 to $6, but by the autumn of 1979, its rise begin to resemble that of a market in a manic state. The price climbed from $6 to $16, and then it stabilized for several months. With silver now stabilized around the $17 level, the exchanges were concerned that the rich investors doing all the buying were trying to corner the silver market. The two exchanges that traded silver had 120 million ounces collectively, and at the rate buying was taking place, it seemed conceivable that International Metals could empty out both warehouses within a matter of weeks.