The remarkable run in gold and silver prices this year has had
me thinking lately -- particularly silver's run. Recently, gold's
poorer cousin reached 30 year highs, with prices reaching $30 per
ounce on the
market. It reminded me of a story often told by old-schoolcommodity
pros on Wall Street. And I think there are three lessons today's
investors can learn from it.
The year was 1971 andinflation was on the rise. In the past,
investors had long turned to gold coins and bullion as a store of
wealth and protection againstinflation . There was one little
problem this time: the United States had abandoned the gold
standard, and it was illegal to own gold bullion.
But millionaire brothers Nelson Bunker Hunt and William Hunt, sons
of the legendary oilman H.L. Hunt, had a plan.
In 1973, the Hunt brothers began purchasing silver futures
contracts. Not satisfied to stop there, the brothers decided to
hold many of the contracts to maturity and actually take delivery
of the metal, an unusual tactic in a market in which virtually all
positions are offset before the contracts expire.
The strategy seemed to work: between 1973 and 1979, prices had gone
from $1.95 to $5 -- a gain of more than 156%.
The brothers figured if they bought enough silver, they could
corner the market and make that 156% gain seem like chump change.
By 1979, they had nearly succeeded. That year, prices rose to more
than $50 an ounce, and the Hunt brothers were rumored to hold about
one-third of the world's silver supply in storage.
But the story doesn't end there.
With prices so high, people began selling all the silver they could
get their hands on. Prices plummeted 50% in four days. And the Hunt
brothers had overleveraged themselves to the point that when
calls came in, they were left holding the bag.
Later, theCommodity Futures TradingCommission changed the rules
regarding margin trading and charged the Hunt brothers with
manipulating the silver market. Lawsuits ensued, and the Hunt
brothers were forced to pay millions in fines, back taxes
andinterest as a result. All told, it's estimated the brothers lost
more than $1 billion in the endeavor.
I bring up this story not for your entertainment, but for an
important lesson -- three to be exact. And I think it bears
particular importance with regard to gold and silver's recent
: Leverage can break you. It's regrettable, but 30 years later it
seems much of Wall Street still hasn't figured this out. When
used by experienced investors, a little
can juice returns. Just don't get too greedy.
: Uncle Sam can change the rules. Investors: plan accordingly.
: Know when to sell. Sounds simple -- but it's easier said then
done. If you're sitting on a position and aren't sure if there's
more upside, there's no shame in booking a niceprofit and moving
Action to Take -->
When it comes to precious metals, these lessons are even more
important. The gold and silver markets are notoriously volatile and
can turn on a dime. And as our own David Sterman
, a market rally is often simply the result of investors following
Having said that, experts like Nathan Slaughter, editor of
newsletter, think silver could still have more room to run. And
instead of buying an
exchange-traded fund (
iShares Silver Trust ETF (NYSE:
, Nathan holds
Silver Wheaton (NYSE:
, a silver streaming company that acquires silver production from
counterparty miners. This means the company has virtually no
(it costs very little if you're just buying the silver production
from a mining company). This gives you the upside of silver bullion
without any storage or insurance costs. The company doesn't mess
around with futures contracts and doesn't use any leverage, either.
If you think silver has more upside, it's a goodoption .
-- Brad Briggs
A graduate of Baylor University, Brad joined StreetAuthority in
2008 after working in the banking industry and at The Texas
Observer. Brad's researching experience includes... Read more.
P.S. -- Using the same principles that helped trounce the
S&P 500 for seven years, one of our top investing gurus, Nathan
Slaughter, hand-picked all 10 of the stocks featured in his latest
exclusive report, The Top 10 Stocks for 2011. These 10 stocks are
not only poised to deliver above-average returns throughout the
2011 calendar year, but also in the years that follow...
Disclosure: Neither Brad Briggs nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.