Silver Thursday: A Defining Moment in Silver Market History

Introduction: 

While some trading days mark some bad news for the global stock market, one famous historical event is the largest single crash in history involving a precious metal: Silver Thursday.

This article explores the events of that day, its key players, and the lessons it can teach investors around the world.

Silver Between Industry and Safe Havens!

Silver is one of the main metals in the world of industry, with its market value estimated at approximately $1.8 trillion, according to CompaniesMarketCap.

Just as silver prices are affected by the general economic situation, and the industrial situation in particular, it is also considered a safe haven during times of recession (as can be seen in Figure (1)).

Figure (1): Silver Price Movements During the 2008 Financial Crisis and Economic Activity

You will notice that silver prices rose after 2003, the year in which global economic activity surged following the dot-com crisis (2000-2001). 

This was due to increased demand for metal in many industries, particularly technology.

However, silver prices also rose during financial crises, between 2008 and 2011, for two reasons:

• The first was the demand for silver as a safe haven during the global financial crisis at the time.
• The second was related to international efforts to revitalize the economy, which was generally observed in 2012.

In fact, silver significantly outperformed gold trading, with the price of gold rising by 167% monthly between August 2008 and August 2011, while silver trading rose by more than 200%. 

Indeed, silver continued to rise by about 400% from its low in October 2008 to its highest in April 2011.

Silver has a black day too! What was Silver Thursday?

Historically, silver has only approached $50 twice. The first time was in 2011, which we mentioned earlier.

But the surprise is that the second time happened 45 years ago. 

The surprise here is related to the reason, not the fact that the price reached those levels at that time (which you can see in the following chart).

Figure (2): The first historical rise in silver prices (before Silver Thursday)

In the 1960s, like Elon Musk now, Nelson Bunker Hunt was the richest man in the world due to the wealth of his father (the legendary oilman H.L. Hunt).

However, in 1970, Nelson predicted that both the American and global economies would enter a severe economic crisis, and he saw that the world would collide with an inflationary crisis (which happened in the late 1970s).

Nelson and his brother turned to a safe haven to protect their money, away from gold (which was prohibited for American individuals to own due to the Franklin Roosevelt Act of 1933). The brothers turned silver, which was priced at only about a dollar and a half at the beginning of the 1970s.

However, in 1973, the Libyan president nationalized Libya's oil fields, including those belonging to the Bunker family, according to the New York Times. This prompted Nelson and his brother to increase their demand for silver to protect their wealth from inflation, which was beginning to become clear at the time.

The brothers purchased futures contracts for 55 million ounces of silver, bringing their total silver holdings to 100 million ounces.

The brothers did not sell the silver contracts; rather, they executed the contracts, received the silver, and flew it to Switzerland for safekeeping. This created two problems:

• The first related to the brothers owning 70% of the global silver supply.
• The second problem resulted from the first, as the global shortage of silver reached $49.45 on January 17, 1980.

These price levels were a direct cause of increased speculation in the metal, which prompted governments, led by the Federal Reserve, to suspend silver trading, officially announcing the suspension on March 28, 1980 (according to data from the Commodity Futures Trading Commission (CFTC)).

This comment surprised the markets, but also the Hunt family, who were required to execute contracts above $50, which led to the price of silver plummeting to $10.80 on Thursday, March 27, 1980, marking the largest single collapse in history for the metal.

This price collapse in silver cost the Hunt family an estimated $1.7 billion, making them the largest debtor in modern financial history.

Despite US government intervention, this situation led to a financial crisis that led to a secondary wave of bankruptcies and mergers among many companies and banks at the time.

Conclusion:

Black Thursday provided many lessons, the most important of which was the issuance of federal regulations to regulate commodity markets, in addition to the reorganization of margin trading.

For investors, this Black Thursday provided one of the most important lessons for investors around the world: the need to diversify investment portfolios and manage risk with a high degree of knowledge and awareness.

Sources:

• Roosevelt's 1933 Gold Theft and Default | Mises Institute
• LIBYA TAKES OVER ALL OIL COMPANIES OPERATING THERE - The New York Times
• History of the CFTC | CFTC
• Silver Thursday | Causes, Impact, & Aftermath | Britannica
• Market Cap of Silver (precious metal)