History remembers the last nominal high in the price of silver before the more recent high of $49.77 seen in April of 2011 as an anomaly that was largely induced by the Hunt brothers' purported attempt to corner the market by buying large quantities of silver and silver futures to the point where they held rights to over half the global amount of deliverable silver.
This remarkable event began in the late seventies and led to a sharp rise in the price of silver to a then-all time high of $48.70 per ounce. The dramatic rally culminated in early 1980 after COMEX silver exchange trading rules were changed to make margin purchases more difficult, thereby forcing the Hunt Brothers to miss a $100 million margin call. The price of silver then collapsed in a traumatic market event that occurred on March 27th of that same year, which has since been dubbed Silver Thursday.
Although later forced to pay out over a hundred million dollars on civil claims that they had conspired to corner the silver market, a loss that ultimately led to their bankruptcy filing, the Hunts claimed that they were simply attempting to start a precious metals backed currency as an alternative to the virtually intrinsically worthless paper Greenback.
Inflation Reflects Lack of Faith in Paper Currency
Interestingly, 1980 was also the ninth year of the first time in modern world history where no major world currency — other than the Swiss Franc that retained a 40 percent gold reserve backing until this policy was ended by referendum in May of 2000 — was backed by anything other than faith in the issuer.
In many ways, the notably high inflation rates of the 1970’s in the United States was an early test of that faith. This phenomenon was directly attributable to the unilateral removal by then-President Richard Nixon in 1971 of the U.S. Dollar from the gold standard that had made it the lynchpin of the post-WWII Bretton Woods system of fixed exchange rates.
Impact of the Hunts’ Efforts
The system has matured considerably since those days. The Hunts managed a small corner in a bigger market, but the Hunts’ long positions were actually smaller than today's manipulative short positions. The silver market is also much smaller today, in terms of the availability of above-ground investment grade silver bars and coins.
Most people choose to ignore this fact, perhaps assuming that the cost of re-mining the billions of ounces of as yet un-recycled silver sequestered in the multitude of electronics, solders, switches, wiring, missiles, ball bearings, old jewelry and silverware will not someday be priced into the precious metal’s value.
Nevertheless, the Hunt effect has had an extended impact on the silver market. For those who came of age during the late seventies and either participated in or simply followed the subsequent dramatic witch hunt, the events made a lasting impression and those days seem almost like yesterday in the minds of many observers.
The generation coming of age in the death of equities and the decimation of the Dollar’s value in an era of exceptionally loose monetary policy is now facing the very same fears that originally motivated the Hunts to buy silver.
The new longs are a diverse group — rather than concentrated holdings that would constitute a market corner — and most of them are interested in taking physical possession of silver. This trend may ultimately make the paper futures market for silver obsolete, leaving it to be dominated by the trading machines.
Monetary Charlatans Ignore History’s Lessons
One key issue with today’s monetary charlatans is that they seem quite content to completely ignore the teachings of history. This includes the recent sordid experience with contemporary “activist” central banking and the resulting persistent monetary inflation that has prevailed over the past twenty years.
History may now be repeating that test. While the man — former Fed Chief Paul Volker —that was then responsible for administering the unpleasant medicine and thus re-establishing a temporary confidence in the Dollar now plays a symbolic role, administering even the slightest fraction of that same medicine in the form of higher interest rates would mostly likely kill the patient altogether.
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