By Tony D’Altorio, Investment U Research Tuesday, May 17, 2011

Mark Twain once said: “History does not repeat itself, but it does rhyme.” Today, silver investors can learn a lesson or two from that observation. In recent months, that market took a swift ride to highs near US$50 an ounce, a level unseen since the early 1980s. But then it took a largely orchestrated and stomach-churning drop. Rumors ran rampant that the only “real” reason silver rose was because some mysterious figure was accumulating a large position. Specific blame fell on everyone from Russian billionaires to a secret silver-buying program by the People’s Bank of China. But the truth may be a lot simpler than that.

This situation is very reminiscent of the late 1970s and early 1980s when the Hunt brothers tried to corner the silver market. The characters have changed since then, but history holds more than a few clues about the future all the same.

The Hunt Brothers’ Silver Thursday

In late 1973 and early 1974, the Hunt brothers bought about 55 million ounces of silver. The commodity cost around US$3 to US$4 an ounce at the time. The two next physically moved that haul to Switzerland on fears of Uncle Sam. They thought the government would seize silver much like it did gold in the 1930s. The brothers continued buying over the years. And in 1979, they partnered up with some Saudi sheiks to set up Investment Company Ltd., a Bermuda-based business. That business then bought 90 million ounces of silver, again taking physical delivery of it. The next few months saw silver spike from US$8 an ounce to US$16 as fears intensified over silver supplies – or the lack therefore – at the Comex, which is part of the CME Group (Nasdaq: CME ) today.

Unfortunately though, the odds didn’t favor the Hunt brothers in the end… A number of people on the board of directors of the commodities exchanges came from big Wall Street banks. And those financials were anything but happy with the Hunts’ actions, especially since they were short 38 million ounces of silver.

Regulators Step In And On the Hunt Brothers

The Chicago Board of Trade (CBOT) started out by raising the margin requirement. And then it limited silver traders to three million ounces of futures contracts; anyone with more than that would have to divest their holdings by February 1980. The price of silver really took off after that, hitting US$34.45 at the end of 1979. In effect, the exchange had confirmed that there was a shortage and investors reacted accordingly. On January 7, 1980, the rules changed again. CBOT announced new limits for all silver futures contracts of 10 million ounces. But silver continued to skyrocket – all the way to US$50! – and the Hunts kept buying.

The axe finally fell on them two weeks later when the Comex limited silver trading to liquidations only. That meant no one could open new positions at all. The very next day, silver fell off a cliff, plunging from US$44 to US$34. And prices kept falling until the Hunts couldn’t even cover the margin for the futures they had bought. They had to liquidate everything and their fortunes soon disappeared as a result. In short, they lost the big game, while the house won… like it always eventually does.

By 1988, the more famous of the brothers, Nelson Bunker Hunt, declared bankruptcy.

Today’s Silver Investor

Fast forward to 2011, when silver recently neared US$50 an ounce again. And once again, it looks like some big Wall Street banks were caught short on the white metal. Not surprisingly, a similar pattern is beginning to emerge. The exchanges already raised the margin requirement on silver and, in turn, it plunged by 27% in a short period of time. If silver recovers back towards US$50, look for further rule changes from the exchanges. It’s what Mark Twain would expect. Silver investors should stay safe and do the same.

Good investing,

Tony D’Altorio

Reprinted with permission of the publisher. The above story can be read on the website www.investmentU.com. The direct link is: http://www.investmentu.com/2011/May/silver-market-memory-lane.html

Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Views expressed are not FNArena's (see our disclaimer).

FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.