Bunkered: The Great Crash of 1980

January 28, 2005

"I was just trying to make some money."

That's what Bunker Hunt said to his sister having just bankrupted one of America's richest families. It took him just three months to lose a multi-billion dollar fortune.

The Hunt brothers will always be remembered as the fools who dared to corner 'the market.' So notorious was the episode, we first learned about it in a textbook at school.

To paraphrase a long story, they bought as much silver as they could...silver futures, silver coins, silver ingots, silver mines. By January 1, 1980, they had accumulated over 192 million ounces of the metal, valued at $35 an ounce.

On the other side of the trade, a whole group of Wall St. types had gone short silver futures, and were getting 'squeezed.' These firms had a legal obligation to deliver silver at predetermined prices to the counter-parties in the trade. Only problem was, the counter-parties - the Hunts and the other silver bulls - already controlled the world's supply of silver.

As the old Wall St. adage goes:

He who sells what isn't his'n, Must pay the price or go to prison.

The 'shorts' were trapped, so what did they do? They changed the rules at the silver exchanges, limiting the amount of silver any one individual could own and increasing margin requirements. Stability was the official justification. It's one of Wall St.'s favorite tricks...if the rules don't work in your favor, you get 'em changed.

Whatever the case, the Hunts were forced to liquidate parts of their position, and silver crashed...from over $50 at its intra-day peak, to below $10 less than two months later. The Hunts went bankrupt and Paul Volcker organized a $1.1 billion dollar loan to "prevent the very fabric of American finance from tearing apart."

That's the story we were told at school. It's also what you read in the newspapers and in most books. But as we found out, it's not necessarily the TRUE story.

Readers will be astonished to learn that the Rude Awakening has inside connections to the story. You've heard us mention Options Hotline editor, Steve Sarnoff. His Dad was Paul Sarnoff, research chief of a large commodity house and a major player in 1970s and 1980s commodity trading.

In fact, when researching this story at the local library, we saw Paul Sarnoff quoted so frequently in the NY Times, we couldn't afford to print all the references.

Sarnoff had first-hand knowledge of the entire episode, and knew many of the principles personally. He even wrote a book about the crash, called "Silver Bulls." You can buy it on Amazon. We had Steve Sarnoff send us a copy.

On April 23, 1980, Sarnoff recalls, he happened to be the speaker on precious metals at the Financial Analysts federation in Houston, Texas. He was interviewed by the Houston Chronicle and told them "Bunker Hunt is not a villain, as the papers and magazines made him out to be."

"It was a personal pleasure" to tell them so, he commented later. The Hunts were not motivated by greed in the slightest, Sarnoff explains, but more by paranoia.

Think of it like this: Everyday his family was trading innumerable gallons of a scarce natural resource - petroleum - for paper dollars. Not a great trade if you're worried about inflation. "Bunker and his family had the ability to see twenty years down the road and realize that the purchasing power of paper dollars could only go one way: down," explains Sarnoff. "So it is understandable that Bunker searched for a natural asset to replace the one sold by the Hunts, which over a period of time would appreciate in value despite inflation."

It's just the kind of logic we like - here at the Rude Awakening regional branch in Baltimore - and we'd buy silver for the same reason.

In fact, Bunker Hunt and his brother still own large quantities of silver. How much? "If you can count it," says Bunker, "it can't be very much."

In 1989, Bunker left bankruptcy with a net worth of between $5 and $10 million, according to Forbes, though he still owed the IRS more than $90 million to be paid over 15 years.

By 2000, he'd already paid it off...which made us wonder what he's doing with his money, now he doesn't have to divert 70% of his income to the IRS.

"Some of that [cash] is going into 4 legs," Forbes answers. "Hattiesburg, a 3-year-old he bought for $20,000 in July 1999, has won $357,000. Asked about it, Hunt says, 'I don't really know anything. I am just trying to win a few races.'"

"...and make a little money," he might have added.

The world’s largest gold nugget is 61 lbs, 11 oz and is on display in Las Vegas.