FM: You were on the board of Comex at the time of the Hunt brothers attempt to corner the silver market. Explain what happened, both from the perspective of an exchange director and the head of a precious metals dealer.
HJ: It was an incredibly complicated story, certainly when you are on the inside of it. We saw that there was more and more buying being done by one enterprise. They were buying a lot of physical silver, they were buying silver futures and we weren’t even sure it was the Hunts initially. There were [surrogates buying silver]. The had brokers who would stand up in the ring and say, ‘Limit up for 1,000 lots.’ People would sell to them. They would come in the next day with bright red jackets so nobody could mistake who they were and shout again, ‘Limit up for 1,000 lots.’ Sure enough, the market went up limit, limit, limit. By the end it was up to the $40, $50 level. A large amount of silver was being gathered physically and very big futures positions were being taken by these enterprises. Of course the futures positions were not of as much risk because the exchange has the authority and the mandate from the regulatory agency to prevent corners and to prevent manipulation. The Comex board eventually concluded that it would [allow] trading only for liquidation, which meant that in the spot month everybody had to get down to a limited amount where people could swap real physical silver with each other and couldn’t have giant positions, and that is what ultimately happened in 1980. By that time the American public was pouring silver into pots that ultimately the Hunts were buying and storing and sending out of the country trying to make a great commotion. They bought an awful lot of silver; they must have had $5, $6, $7 billion worth of silver at the end. And this enormous onslaught of physical silver emerged, keeping the refiners full month in, month out, but as it all came onto the market they simply couldn’t absorb any more.
At the time I wrote about the principle that everybody will try to recognize in attempted manipulations: “Not everyone can leave by the same door.” The moment the first few lots get sold and the market goes down a bit, the margin calls come up. More margin is needed to maintain the long position and people sell some more of their silver to meet that margin call and ultimately the market crashes. The big effort to corner can’t be maintained.
What the Hunt brothers did was to buy an enormous amount of physical silver. If you don’t buy the physical object you cannot have a corner because the longs and shorts in the futures market even each other out. Nobody is going to go short if he hasn’t got the product. [Trading physicals], a long can go long but the other side has to have product to go short. In the futures market the longs and shorts must, before the first notice day, even themselves out.
FM: What was your role as a dealer?
HJ: During the days that the Hunts were buying physical silver, we dealt with them because we were the largest bullion dealers in the world, and they were able to buy an enormous amount of silver through us. In one single trade we sold them $450 million worth of silver in October of 1979.
In 1980, at the time that they had these very large positions and they had borrowed money from their various brokers, the silver market was starting to fall $50, $45, $40. So they had to get out and people came to us and asked ‘What are we going to do with all this silver?” The Hunts didn’t have the money to repay; they had been operating with leverage. We put together a syndicate where we offered to buy $1 billion or more worth of silver in one trade to clean out the market — by that time it was down to $12 or $13 per ounce. We were able to put together a syndicate to buy out the overhang in the market. Interestingly enough, Mocatta had done that on other occasions. In 1913 an Indian speculator bought up a great deal of the London silver stock. (The corner attempt failed when the Indian government would not buy the silver from him and after he went bankrupt the Bank of England asked Mocatta to buy up excess silver.)
FM: What was the long-term impact on futures markets?
HJ: People started to get more realistic about the margining requirements, [making] sure that one had a mathematical approach to margins [so] the exchanges would operate safely. It called a lot of attention to the futures markets and to the silver market. I am not sure it had a great long-term effect.