conversation: User (pfbubbleweek): "**Introduction**\n\nAll,\n\nWelcome back to the third day of bubble week. [On Monday, I discussed Tulip Mania](https://www.reddit.com/r/personalfinance/comments/7b66ya/bubble_week_day_1_tulip_mania/) and [on Tuesday, I discussed the South Sea Company](https://www.reddit.com/r/personalfinance/comments/7be592/bubble_week_day_2_south_sea_company/).\n\nToday, I'm examining the [Silver Bust](https://en.wikipedia.org/wiki/Silver_Thursday) and how it serves as a warning about the dangers of leverage, greed, market manipulation, and just how quickly prices can collapse. Before diving in, a few reminders on the key factors I previously discussed that seem to indicate a bubble:\n\n* They experience a dramatic, often very quick, rise in price.\n* They often involve some degree of opactiy and/or market manipulation.\n* They often have a few very vocal advocates.\n* They are accompanied by wide-spread speculative investment, often fueled by excess capital and/or debt.\n* The market price of the underlying asset differs greatly from the asset's fundamental value.\n* Their collapse leads to widespread panic/systemic problems.\n\nWith this in mind, let's see what can be learned from this chapter of financial history. Hopefully, by the end of the week, you will start to see that "history doesn't repeat itself, but it often rhymes" (apocryphally attributed to Mark Twain).\n\n**Silver Bust**\n\nThe silver bubble began in early 1979 and saw the price of silver increase about 6-fold in about a year. Much of this rise in price came from the [Hunt](https://en.wikipedia.org/wiki/Nelson_Bunker_Hunt) [brothers](https://en.wikipedia.org/wiki/William_Herbert_Hunt) attempting to "corner" the silver market by controlling a large portion of the available silver (special shoutout here to one of my favorite old-time movies, "Trading Places", where cornoring the commodities market is a major plot point).\n\nThe Hunt borthers attempted their market manipulation by purchasing massive amounts of [futures contracts](https://en.wikipedia.org/wiki/Futures_contract). These contracts gave the Hunt brothers the right to receive silver in the future based on a fixed price established at the time of the contract. If the price of silver increased in value, then the brothers would profit by paying the lower, fixed contract price for the now more valuable silver. In esssence, the brother's gambled that they could have the rights to so much silver that people would have to buy it in massive quantities and at inflated prices to meet their obligations and the brothers could profit from the "scarity" they had themselves artifically created.\n\nImportantly, futures contracts are a form of leverage. The Hunt brothers didn't have to pay the full amount for the silver now - only a portion of the eventual price (their "margin"). Thus, if silver dropped in value, the Hunt brothers risked bankruptcy because they were obligated to pay a fixed price for silver that had now *declined* in value.\n\nIn part due to concern over market manipulation, in early 1980 a new rule was passed requiring greater margins (collateral) for buying silver futures. This lead to a drop in the price of silver that increased in speed over the next several days as the Hunt borthers were unable to supply the required additional margin (which effectively kept increasing in size as the price of silver dropped, creating a "snowball" type effect).\n\nIn the end, the Hunt brothers had to be bailed out (in part due to concerns that their inability to repay would bankrupt the "too big to fail" banks of the day) and eventually went bankrupt as a result of litigation over their market manipulation.\n\n**Bubble Checklist - Silver Bust**\n\n* They experience a dramatic, often very quick, rise in price.\n\nYes - value increased approximately 6x in one year.\n\n* They often involve some degree of opacity and/or market manipulation.\n\nYep - the driving force was market manipulation by the Hunt brothers.\n\n* They often have a few very vocal advocates.\n\nNo - if anything many leading voices were objecting to the manipulation (jewlers in particular voiced concerns over the rapid price changes).\n\n* They are accompanied by wide-spread speculative investment, often fueled by excess capital and/or debt.\n\nYes - the use of futures contracts as leverage definetly fueled the bubble and also lead to its collapse.\n\n* The market price of the underlying asset differs greatly from the asset's fundamental value.\n\nYes - at a fundamental level, the need for silver didn't change at all. The price simply rose quickly and then collapsed - the underlying utility of silver didn't change.\n\n* Their collapse lead to widespread panic/systemic problems.\n\nUnclear - no systemic problems occurred although this is partially the result of intervention. It is unclear how much contagion would have occurred had the Hunt brother been allowed to go bankrupt.\n\n**Visual Aid - Standardized Silver Prices**\n\n[Graph of Silver Prices](https://imgur.com/NUpZpXt)\n\nData Source - [Online prices here](http://www.macrotrends.net/1470/historical-silver-prices-100-year-chart); data points in the graph represent samples taken every 6 months (January/July) during the "bubble period" (July 1976-1982).\n\n___\n\n**Footnote** - originally I also intended to discuss the [Uranium Folly](https://en.wikipedia.org/wiki/Uranium_bubble_of_2007) of the mid-late 2000's. Upon review, I felt like my explanation was messy and didn't really do a great job explaining what happened."
  Self: "Thanks for putting in this effort. \n\nBut my main gripe with your posts are that they are so cursory they skip over a lot of major points. For example your definitions of bubble seem rather arbitrary and your glance over a lot of things that would be necessary to fully understand the situations presented.  "
  User (pfbubbleweek): "Please feel free to add additional details as you think important. I've picked the amount of content that I think best balances being readable with capturing the most important details. I never intended to write an exhaustive examination of every event."
  