Analyzing Warren Buffett’s Investment in Silver

Known as “the Oracle of Omaha,” Warren Buffett, Chairman of Berkshire Hathaway Group, is considered by many as the greatest investor of all time. His wealth fluctuates with the performance of the market, but this year, according to Forbes Magazine, he is the second richest man in the world (behind Bill Gates).

Buffett is a “value investor” and fervently believes in the simple adage, “buy low and sell high”. Of course there is more to it than that, but the strategy of a value investor is to hunt for companies or commodities which are under-priced for their value.

Beginning in 1997, the Oracle of Omaha saw the value of silver glinting in the dust of depressed prices. From 1997 until 2006, his investment fund-Berkshire Hathaway-accumulated over 37% of the world’s known silver supply-even more than the COMEX! During that time, he was not only an oracle but also the all-time silver bull.

Warren Buffett, who’s arguably the most successful investor invested in silver bullion because of the fundamental changes in supply and demand. In a press release by his company, Berkshire, Warren Buffett had this to say:

“Over 30 years ago, Warren Buffett, CEO of Berkshire Hathaway, made his first purchase of silver in anticipation of the metal’s demonetization by the U.S. Government. Since that time he has followed silver’s fundamentals but no entity he manages has owned it.”

This is interesting,? “anticipation of the metal’s demonetization by the U.S. Government” meaning when President Nixon took America off what is know as the Gold Standard, Warren Buffett suddenly became interested in the price of silver.

“In recent years, widely-published reports have shown that bullion inventories have fallen very materially, because of an excess of user-demand over mine production and reclamation. Therefore, last summer Mr. Buffett and Mr. Munger, Vice Chairman of Berkshire, concluded that equilibrium between supply and demand was only likely to be established by a somewhat higher price.”

Buffett’s silver buying spree caught almost everyone off guard. After all, the man made his billions by buying and holding undervalued stocks. Once again, Buffett was ahead of the pack when he saw the imbalance in silver supply and demand and the potential reflected in low prices.

When Buffett started buying silver, it was just under $6 an ounce (silver now trades at over $13). It wasn’t until 2006 that Berkshire made its move to cash in on its hefty investment in silver; however, that move is still considered controversial.

Buffett to the rescue? In 2006, the first Silver Exchange Traded Fund (SLV) owned by Barclays was trying to get approval from the SEC by promising that it would hold silver to back up its shares.

At that time, the newly proposed fund could only take delivery on a portion of the needed amount of silver because of tight supplies and Barclays was rumored to have borrowed or purchased over 130 million ounces of silver-about the total amount held by Berkshire Hathaway at the time.

As Berkshire Hathaway stored its silver in London where there are no reporting requirements, the transaction has yet to be substantiated.

So about the same time that the new fund (SLV) was looking for physical deliveries of silver, Berkshire Hathaway sold out its entire stock. Buffett said he sold at about $ 7.50.

Subsequently, the new fund (SLV) was approved and went active on the American stock exchange on August 28, 2006.

But the genius of Buffett was called into questions as it appeared that he sold way too early; the price of silver has more than doubled from Buffett’s average purchase price of around $6 per ounce. Many-including Buffett himself- felt he sold out too soon.

At the 2006 Berkshire Hathaway annual meeting, Mr. Buffett was asked about the fund’s silver holdings and Buffett responded:

“We had a lot of silver once, but we don’t have it now—and we didn’t make much on our prior holdings.” He went on to say: “I bought [silver] early and sold early. Silver was my fault. [Speculation] is wildest at the end.”

But none of the Berkshire Hathaway shareholders seemed to begrudge the Oracle of Omaha the estimated $500 million in potential profits it cost to help bail out Barclays new fund.

In summary, the statements Mr. Buffett made about silver in the 2006 annual meeting tells us two things: 1) Berkshire Hathaway has no current silver holdings; 2) the Mr. Buffett no longer views silver as a viable holding at current prices.

Of course, there are other reasons to invest in silver such as hedging against inflation, portfolio risk reduction (weak or negative correlation with equities) or the continuing fundamental issues of supply and demand, but from Mr. Buffet’s value investing strategy, silver has come and gone until the price of silver comes down significantly.