Peter J. Cooper’s Weblog

This week XTO Energy finally agreed to buy Hunt Petroleum for $4.2 billion after a long legal tussle between Hunt family heirs. The firm was founded by the late billionaire HL Hunt whose sons Nelson Bunker Hunt and William Herbert Hunt once cornered the world silver market in the 1970s.

Hunt is a privately held company which makes no public comment on its affairs. But commentators think the Hunts are calling the top of the oil market and that the price for Hunt Petroleum suggests a quick deal was the objective.

However, market watchers are bound to wonder if the Hunts are planning to re-enter the silver market which they so dramatically dominated in the 1970s. It was in 1973 that the family first decided to buy precious metals to hedge against inflation, much as many rich investors are doing today.

Together with several wealthy investors the Hunts formed a silver pool and by 1979 held half the world’s deliverable silver supply, some 200 million ounces. Having effectively cornered the markets, the pool used leverage to drive the price of silver to $54 an ounce. But the authorities changed the rules on margin trading and crashed the market. The Hunt brothers eventually declared bankruptcy and by 1987 their liabilities of $2.5 billion exceeded assets of $1.5 billion.

After that experience you would have to have a pretty thick skin to try playing the same game again. But history does have a habit of repeating itself, and you have to wonder what investment options are open to a family with $4.2 billion to tuck away in present markets.

Precious metals are once again an attractive diversification strategy at a time of high and mounting inflation. Nothing erodes the value of cash deposits like inflation. The ever secretive Hunts could learn from their past mistakes and avoid margin trading, and still take a commanding position in the silver market, although this sum is too small to impact much on gold.

Of course, the irony of the 1970’s episode may not have been lost on the next generation of Hunts. They did indeed select one of the best possible investment strategies for that decade, and if they had not gotten too greedy with margin trading their position would have been unassailable.

So personally I would imagine the Hunts might well venture back into precious metals, and probably in a big way. But don’t expect to read any announcements or for the family to get carried away trying to corner the market again.

How high could silver go? We are still a long way shy of the $54 an ounce high of 1980 reached courtesy of the Hunt pool, and every other commodity is now past its previous all-time high. The silver market is a relatively tight and small one, so any renewal of serious investor interest, perhaps on the back of another bull run for gold is likely to take prices far higher.

An inflation adjusted all-time peak silver price would be $120 on simple adjustment to the consumer price index and much higher if related to the money supply increase over 28 years. Could the Hunts again invest in the most undervalued commodity in the world to beat inflation? They would be foolish not to!