In the 1980s, a special pair made decisions that would forever shape the future of one of the most important financial markets. Both were bold – and that boldness ultimately led to disastrous stakes.
Short selling is a financial strategy in which investors place bets against a particular asset, hoping to profit from a decline in its price. Although this can be a risky and controversial strategy, it is widely used as a profitable trading strategy. One of the most interesting examples of short selling in history occurred in the 1980s, when two brothers named Nelson Bunker Hunt and William Herbert Hunt made a bold and ultimately disastrous bet regarding short selling. Price of silver,
The Hunt brothers, members of one of America’s wealthiest families, had been interested in silver for years. In the early 1980s, he believed that the price of silver was artificially low, and decided to use his vast wealth (and borrowed funds) to try to raise the price. They began buying silver in large quantities, and they made contracts to buy even more in the future.
As the Hunt brothers continued to buy silver, the price began to rise. Using leverage, or borrowed money, the purchasing power of the wealthy brothers began to outweigh investors who had anticipated a fall in the price of silver. When the same investors were forced to cover or open their trades which were turning down in silver, this increased the buying pressure in silver – a ‘short squeeze, This added pressure meant that the Hunt brothers’ bet was beginning to pay off, and the price of silver continued to rise.
As the price of silver increased by almost 10 times, the exchanges handling this trade started taking note. In 1980, the rules were changed regarding leveraged bets in the commodity markets. This decision meant that Hunt Brothers had to immediately reduce the level of their holdings. This panic caused a sharp fall in the price of silver. The rush to exit resulted in a decline in both the price of silver and Hunt Brothers’ position.
Despite their best efforts, the Hunt brothers were unable to stop the fall in the price of silver. In the end, he was forced to sell his silver at a heavy loss, and was unable to pay the debts incurred as a result of his failed bet. At one point, it was estimated that the Hunt brothers held billions of dollars in positions and held about a third of the world’s silver supply.
Today, the story of the Hunt brothers is a reminder of the risks and uncertainties sell short, and about the dangers of trying to manipulate the market. While short selling can be a profitable strategy, it can also be incredibly risky, and investors should be careful to consider all potential risks before placing a bet against an asset.