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Anyone know why gold prices drop by $400 an ounce in 1981?

gold prices http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

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The Hunt brothers were worried about Nixon taking the US off the gold standard in 1971. They started to purchase silver as a hedge against the devaluing dollar. They had to purchase silver because it was not legal for Americans to own gold until 1975.

The two wealthy brothers began purchasing silver futures contracts on the commodity exchanges. The Hunt brothers took delivery of the silver at the expiration of the contract instead of rolling the contract over into a new contract. In 1974 they had managed to acquire around 55 million ounces of physical silver. They charted three 707 planes to transport 40 million ounces of silver from the US to Switzerland. enter image description here

They continued to purchase silver contracts and taking delivery of the silver at the end of the contract. They were now borrowing money to purchase the contracts. By 1979 they had purchased 43 million ounces of silver through COMEX and CBOT – the two major commodity exchanges.

By 1980 they had 90 million ounces of silver in futures contracts. COMEX and CBOT started to restrict silver trading since it was widely believed the exchanges did not have all the silver to deliver to the Hunt brothers. First they raised margin requirements. Then they set limits with regard to the amount of silver contracts that could be held by any one investor.

Finally in January, 1980 the exchanges halted all trading of silver and forced contract holders to sell any contracts that were over the individual owner limit. The buyers knew the sellers were forced to sell so the price of silver came crashing down. The Hunt brothers declared bankruptcy since they could not cover the loans they used to purchase the silver.

Another major factor in the crash of gold and silver was Volker taking over as the Federal Reserve chairman. Volker raised interest rates substantially reducing the amount of leverage being used to speculate in the market. enter image description here

Sources: here, here.

  • +1 Nice post, although it's worthwhile to point out that the Hunt brothers had started trying to corner the silver market before the US left the gold standard. Like many savvy investors/economists, they saw the imminent failure of the gold standard and the Nixon shock coming, but describing their actions completely in terms of "hedging themselves against inflation" glosses over the fact that they also sought to turn a massive profit (which to some extent, can be an inflationary hedge itself). – John Bensin Mar 27 '13 at 15:35
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Much of the bubble back then was caused by the Hunt Brothers attempt at cornering the silver market. This was 30 years back and I'm answering from memory, but I recall these two Texas billionaires decided they would buy silver futures and keep taking delivery. Most futures contracts are settled in cash, only a small fraction results in taking the product. When a futures contract seller found the Hunts at the other end, they needed to buy spot silver to deliver the metal. This made silver run up to $50 or so at its peak. As the price rose and their effort to keep propping it up failed, the market collapsed. Again, as I recall, this was silver-centric, gold went along for the ride as part of the late 70's inflation run. The collapse of silver and end of the very high inflation popped the gold bubble as well.

  • Great response. I'm guessing that Reagan was able to combat inflation within in his first year in office. So is today's increase a bubble? We don't have inflation or anyone trying to corner a market. – jspooner Oct 31 '10 at 20:47
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    we have fear of inflation now. – Havoc P Nov 2 '10 at 19:59
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    the generally-accepted story is that Volcker (the fed chairman at the time) broke inflation, and caused a recession, by raising rates. en.wikipedia.org/wiki/Paul_Volcker Volcker was a Carter appointment predating Reagan. – Havoc P Nov 2 '10 at 20:03
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    @Havoc its interesting that the most crucial decision for the end of destructive inflation (and yes, the cause of the subsequent recession) is attributed to a Carter appointee, yet all the praise for ending stagflation and restoring american economic growth was given Reagan. Sometimes I think Carter gets way more flack than he actually deserves. – crasic Jun 4 '11 at 9:15
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Gold dropped in price because sellers of gold wanted to sell more than buyers of gold wanted to buy.

What JoeTaxpayer talks about gives insight as to why. The rubber meets the road in the market, though.

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    +1 for sticking to basics. I have to grin at this answer. Every day, the pundits try to answer why the market did this or that, yet, you are dead on, every move is supply/demand driven. Somewhere, someone is willing to pay more than sellers re going to sell at, so the next transaction needs to occur at yet higher prices. We'll see if others chime in. The younger folk know this through history only, wonder what their take it. – JoeTaxpayer Oct 31 '10 at 12:42
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    This is the financial equivalent of "Why did the plane crash? Because it hit the ground.". True but unhelpful. – DJClayworth Apr 18 '11 at 15:55
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    @DJClayworth: When faced with a problem, one must start with the obvious first. One has to know that the plane actually hit the ground before figuring out why it went down. Too many people start pointing fingers at a cheap fuel filter before they ask whether it even affects the combustion efficiency, let alone causes an engine to fail. – mbhunter Apr 18 '11 at 16:14
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Gold prices dropped in 1981 because they went up "too much" in 1979-1980

The reason why gold prices went up so much in 1979-1980, in my opinion, was the Iranian hostage crisis. Inflation alone doesn't fully explain the sharp jump. A rise from say, $200 to $300 would have been more "in line."

The hostages came home in January, 1981 (I was waving a flag on Lower Broadway for them.) Problem solved, gold dropped in response.

  • I still have my "Welcome Home, Hostages" button. – JoeTaxpayer Mar 29 '13 at 4:22
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This graph should help, considering what happened during the times of the last 3 spikes.

enter image description here

protected by Chris W. Rea Jan 26 at 4:44

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