Attempts to Corner the Gold Market
Ah, finance. Never boring. Especially when it’s brilliant, brash, and greedy. Enter the world of “cornering a market.”
Cornering the market means acquiring enough shares of a particular security type or holding a significant commodity position to be able to manipulate its price.
The most direct strategy for attempting a corner is to buy a large percentage of the available commodity offered for sale and hoard it. Commodities have included tin, cattle, copper, gold, silver, cocoa, and even onions, with the first reputed corner being that of olive presses in c. 6th Century BC. (Thales of Miletus, The Politics by Aristotle, Book I section 1259a).
Most corners fail as they are necessarily vulnerable due to the size of their position, making the attempt highly susceptible to market risk. In most cases, those seeking to corner run out of money before arriving at the critical asset mass required.
While the Black Friday financial rout caused by an attempted gold corner by the nefarious Jay Gould and Jim Fisk is illustrative in that the commodity was gold, the best example of a nearly successful precious metals corner is that of the silver corner by the Hunt brothers in the 1970’s culminating in Silver Thursday, on March 27, 1980, when the price of silver collapsed.
The Hunt brothers believed that inflation would result in silver becoming a haven, like its cousin, gold, as inflationary pressures built that would destroy any investments denominated in or tied to paper currency.
They began to buy physical silver and, instead of closing out contracts with cash settlements as was common in the industry, they took delivery of the silver, stockpiled it, and used their large cash reserves to buy up even more. After the Hunt brothers had accumulated about one-third of the entire world’s supply of privately held silver to a tune of over $1 billion dollars, they continued to leverage their family fortune. In the end, the Hunts’ position was worth about $4.5 billion with less than one-third of the silver market left that the Hunts did not control.
This enormous position, in addition to the fact that the Middle East was involved, finally triggered the U.S. government to consider that something might be awry and the Federal commodities regulators and Federal Reserve finally stepped in with new rules and bank guidance that eventually led to the collapse of the market and the Hunts’ demise.
