In terms of finance, hoarding is the practice of holding or piling up of assets, namely money, goods, or securities. Preparation for future events causes individuals or companies to save up such assets. However, hoarding occurs when the act of saving goes above and beyond what is needed for immediate profit, covering expenses, or reasonable preparation for future events. In most cases, it happens because an individual or company fears what could happen in the future – lack of funds, higher stock prices, etc.
Hoarding crosses into another category altogether when a company uses it as a business strategy to manipulate the market. The practice is known as “cornering the market.”
Cornering the Market
Companies or individuals often try to corner the market by buying up a substantial portion of goods/securities in a respective market. The goal is to eliminate the market rivals, effectively gaining the ability to drive up prices, with the intention to resell the goods/securities at an inflated price.
Cornering the market is illegal and usually unsuccessful. When a company begins to stockpile securities or commodities, they give themselves away. Once the information becomes public, oppositional forces rise up against the attempted corner, essentially blocking the attempt at a market takeover. While similar to monopolization, cornering the market differs in that other companies are still able to operate in the space and generally are able to block the cornerer.
The Legality of Hoarding
In essence, hoarding is not illegal. However, once an individual or company begins to buy up or stockpile large amounts of a commodity or security, the Securities and Exchange Commission (SEC) watches closely. The federal agency works to make sure that an individual or company is not trying to monopolize or corner the market. Currently, there are SEC rules and regulations in place to keep entities in check and to prevent a cornering situation from taking shape.
It’s not always clear when an entity (individual or company) starts to hoard if they are simply fearful of future events or if they are keen to manipulate prices by cornering the market. Hence, there are regulatory bodies and rules in place that are used to monitor hoarding behaviors in order to prevent illegal manipulation of the market.
Hoarding Throughout History
There are several examples of hoarding throughout history; however, the most notorious case is that of the three Hunt Brothers who, in the 1980s, attempted to corner the silver market. A decade earlier, the brothers began purchasing bulk amounts of silver that was trading for around $1.50/ounce.
Over the next 10 years, the brothers bought up the majority of the market’s physical silver, stashing it in banks around the globe. They also took up buying futures contracts, giving them the opportunity to purchase 55 million ounces of silver.
Silver spiked to around $50/ounce at the beginning of 1980. The brothers were unable to buy up more silver because they could no longer secure financing for it. Their inability to continue cornering the market forced them to begin selling silver. The sudden release of large amounts of silver back into the market caused silver prices to plummet. By the time the fiasco ended, the brothers barely escaped complete financial ruin.
There is a certain logic to hoarding, particularly for individuals. When companies begin to hoard, the line between stockpiling and cornering the market becomes blurred. The key difference between legal hoarding and illegal cornering attempts is intent. Stockpiling resources to manipulate the market (cornering) is highly illegal.