Silver's Long Struggle to Top $50...Interesting Market History
Silver has attracted some unusual attention this past year, rallying to a multi-year high above $30 per ounce back in August and again to $30 per ounce in early-February amid a rally that some credit to WallStreetBets traders. These are the two highest levels we have seen silver trade since 2013. Prices have since pulled back but the trading frenzy has revived some interesting history about the precious metal. Remember, it was the crazy run higher from mid-2009 to 2011 that skyrocketed silver prices to nearly $50 per ounce. There has been some talk of perhaps similarities between then and now with the Fed and government issuing massive bailout programs. I just wonder however if the big bounce we are currently seeing in Bitcoin isn't what we watched happen in the Silver market back in 2009-2011?
If you've been following any of the market chatter lately, silver bulls have been talking about how 2021 is the year that the white metal will finally break through to the other side of the $50 milestone. Interestingly, I've heard that battle cry several times in my trading and investing career. For full disclosure, I still own a fairly sizeable amount of "physical silver" from a few of those previous learning lessons. At the time, I was much younger and I was simply going to be a "trader" of silver, holding no longer than 12 to 24 months. But when the bottom falls out of the market you quickly change your mindset to becoming a longer-term investor. I always laugh at that... Many of us start out as a short-term trader but by no choice of our own eventually become a long-term investor when prices collapse. It's funny how the market can quickly change our entire approach.
Silver has made a convincing run at $50 only twice in modern history. The first time began in 1979, when the price for silver (based on the London Fix) jumped from $6.08 per troy ounce on January 1, 1979, to a record high of $49.45 per troy ounce on January 18, 1980, an increase of +713%. Four days after reaching that peak, prices had dropped more than 50%. Over thirty years later on April 25, 2011, silver hit $49.80 per ounce in the New York spot market. But again, the rally was short-lived, with the price of silver below where it had closed the previous year by the end of 2011. Below are more details about both historic rallies.
Silver Thursday - The story of silver's 1980 rally is one of legend. As the story goes, Nelson Bunker Hunt, Lamar Hunt, and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., began accumulating large amounts of silver beginning in the early 1970s. By 1979, they had nearly cornered the global market, holding around one third of the entire world supply (outside what was held by governments). Primarily because of the Hunt brothers' accumulation of the precious metal, prices of silver futures and silver bullion rose from $11 an ounce in September 1979 to $50 an ounce in January 1980. The situation for other prospective purchasers of silver was so dire that on March 26, 1980, the jeweller Tiffany's took out a full page ad in The New York Times, condemning the Hunt Brothers for artificially inflating silver prices.
On January 7, 1980, in response to the Hunts' accumulation, the exchange rules regarding leverage were changed. Partially due to the new restrictions, the price of silver declined by over 50% within less than a week. Despite their own fortunes, the Hunt brothers had heavily on margin loans to fund their silver purchases. Soon, word began to spread that the brothers were unable to meet some $100 million in margin calls from their brokers. With the Hunts' facing a potential $1.7 billion loss, panic ensued across the financial markets. Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse. The most infamous day of the month's long crash came on Thursday, March 27, 1980, when the price of the white metal fell from $21.62 to $10.80 per ounce. To save the situation, a consortium of US banks provided a $1.1 billion line of credit. By the end of 1980 silver prices had subsided to around $16.00.
Debt Ceiling Silver - The silver market's 2011 run to $50 was very different to that of 1980. The U.S. and global economy were still recovering from the financial crisis in 2008-2009. Another round of Quantitative Easing beginning in November 2010 had already started a shift to "safe-haven" assets like gold and silver. Then in 2011, Republicans in Congress demanded deficit reduction be part of legislation raising the nation's debt-ceiling. Due to the resulting contention in Congress and the threat of the U.S. defaulting on its debt, the S&P issued a "negative" outlook on the U.S.'s "AAA" rating. On April 25, 2011, silver traded at an all-time high of $49.80 per ounce in the New York spot market, nearly double where it had been 6 months before. The credit downgrade and debt ceiling debacle also contributed to the Dow Jones Industrial Average falling nearly -2,000 points in late July and August. However, as it became clear that the Treasury would use extraordinary measures to prevent a debt crisis, investors started dumping silver and commodities and moved back into U.S. equities. The price of silver quickly went back to $30 and declined below 2010 levels in the next few years. (Sources: Investopedia, Forbes, SilverPrice)
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