Who among us is old enough to remember the Hunt Brothers? If you were in the market in the late ‘70s or early ‘80s, their attempt to corner the silver market became an unforgettable saga – one that ended in financial ruin for many. Those of us who entered the business even a decade or more after that were still familiar with the story, as veteran traders imparted the lessons of that quixotic quest onto their trainees. I just checked Google trends and saw only a mild increase in searches for the Hunt Brothers. Today’s trading activity makes me think that many of those lessons have been forgotten.

Image by Mylene2401 from Pixabay

Last week we started to hear that the r/wsb crowd was starting to look at silver. At a superficial level, that fits with the theme of looking for heavily shorted names. The main silver ETF, the iShares Silver Trust (SLV), had a short interest of just over 24 million shares as of January 15^th (remember that short interest is reported bi-weekly by the major exchanges). Yet there are many different dynamics at work in the commodities market than in the stock market, and I fear that those are not fully understood by those who are rushing headlong into silver and the companies that produce it.

Silver is not just a precious metal; it has industrial uses as well. That pits retail traders against a wide range of traders at large companies who possess an incredibly nuanced understanding of the mechanics of that market. When the Hunt Brothers were in vogue, the largest consumers of silver were Kodak, Agfa, Fujifilm, and the like. It was key to the photo processing business. That business has faded in popularity of course, but there are still a wide range of other uses. It is important to acknowledge that it is much easier to move an individual company like GameStop (GME) or AMC than it is to move a commodity with a global web of international producers, users, and traders. 

The Hunt Brothers began their quest when inflation was rampant, and silver was viewed as a hedge against that inflation. They primarily utilized the commodity futures markets, which afforded them a very high degree of leverage. Then they continued to pyramid their leveraged positions, borrowing more money when it became time to take delivery on their contracts.

Ultimately the scheme unraveled. One of the main catalysts for the decline was the clearinghouse’s decision to limit silver purchases and raise margin rates. They were concerned for the integrity of the clearinghouse and its members. Bear in mind that exchanges always retain the right to adjust margin rates as necessary and pass those requirements onto its member firms and their customers. It is not about wanting to stop a move per se, but about self-preservation. This should sound quite familiar to those following the GME shenanigans.

Another key problem that the Hunt Brothers encountered was that silver can reappear in the market from all sorts of places. Companies melted down coins to extract small amounts of silver, and all sorts of regular people sold jewelry and silverware at inflated prices. The more the price rose, the greater the tradeable supply grew. That is one of the great ironies that is being missed by the r/wsb crowd – if they want to stick it to the boomers, this will have the opposite effect. Many of them have grandma’s silver sitting in the attic or basement and would love the opportunity to sell it for unexpected prices into a willing market. Meanwhile, the faithful have to raise the money to buy silver and its stock from somewhere, and many appear to be selling the stocks that led the craziness last week. If this is for the “lulz”, who exactly is the butt of the joke?

We are living through a truly crazy time in the markets. Crazy, but not unprecedented. It was difficult to find an exact precedent for the nuttiness in GME and the like, but a quick internet search will yield a valuable precedent for today’s goings-on in the silver market. Please do your homework before you pile in.