The collapse of the silver market meant countless losses for speculators. The Hunt brothers declared bankruptcy. By 1987 their liabilities had grown to nearly $2.5 billion against assets of $1.5 billion. In August of 1988 the Hunts were convicted of conspiring to manipulate the market.

The stock market had its own troubles during the rise and fall of silver. The Dow Jones peaked on February 13, 1980 at 903.84. The day of the collapse, March 27th, the Dow closed at 759.98, a decline of 16% in just 6 weeks. [However, intraday, the loss between the 2/13 high of 918.17 and the 3/27 intraday low of 729.95 was actually 20%.]

      For many traders the collapse in silver was the final straw for a stock market already under siege from worries as diverse as the Iranian hostage crisis, the Russian invasion of Afghanistan and soaring interest rates. [The consumer price index climbed at a 13% rate for 1979. The prime lending rate hit 22% in early 1980]. But by the year’s end, the whole decline was almost forgotten. The Dow ended the year at 963.99, thanks in large part to the euphoria over the election of Ronald Reagan.

      Oil Price Boom and Crash: Another Hunt effect in the Making!

In 1980, the Hunt brothers cornered the silver market, causing an epic price spike and then a bust. Crude oil is close to $135 a barrel today. Is something similar at work?

The US Congress held a hearing on market manipulation in Washington yesterday, it seems the US congress suspects there is more to oil price than just increasing consumption.

Many in the sector believe that the big institutions that have entered in recent years are “accidental Hunt brothers”.

Investment in indices based on commodity futures have risen from $13 billion five years ago to $260 billion now, that’s a 2000 percent increase. The rise in investors’ demand for oil futures is more of a speculative demand than any hedging against the commodity.

Historically, futures markets are naturally short (betting on a fall) as producers tend to buy futures to guard against falls in prices. In 1990, only 13 per cent of open interest in crude oil futures was long. That is now up to 58 per cent and according to me it is a clear danger sign. If and when the oil bubble burst and the longs (betting on a rise in price) have to square their positions or give more margins, the oil prices could come crashing down. And there is no shortage of commodities in the US - although many fear there are constraints elsewhere in the supply chain.

There are arguments against this. Big economic factors are at work, notably the weakness of the dollar. Federal Reserve officials note that there is no sign of big increases in inventories of commodities. This would be expected if speculators were betting on prices to rise.

Speculation appears to be changing the way commodity markets work. A debate is needed and changes to regulations may be justified. But speculators cannot take all the blame for the price spike.

If the global economy is heading towards a recession, as was proclaimed by leading experts after the sub prime mortgage crisis in the US, then the consumption of oil will also drop to some extent.

Right now it seems we are going to repeat history and the stock markets took a serious tumble as if the 1980’s scenario is being repeated. The silver lining to the 1980 crash was that stock markets not only recovered later in the year but also made significant gains. Let us just hope that if history repeats itself, it does so in totality and not in bits and pieces.