1998: What did Buffett buy silver?
AUDIENCE MEMBER: Good morning, or afternoon, actually. My name’s Matt Schwab. I’m from New York. Pound Ridge, New York.
I actually had a question about the silver purchase last year. When you announced it, you said that you believed that supply and demand fundamentals would only be established at a higher price — re-established at a higher price.
I was just wondering if you could go into more detail about what some of those fundamentals are. I mean, we’ve read a lot about, like, battery technology and some other things.
WARREN BUFFETT: Yeah, we have no inside information about great new uses for silver or anything of the sort. But the situation — and you can get these figures and they’re not precise, but I think they’re in general — they’re generally accurate.
You can see from looking at the numbers that aggregate demand, primarily from photography, from industrial uses, and from ornamental jewelry-type uses, is close. Call it 800 million-plus ounces a year.
And there are 500 million or so ounces being produced of silver, annually, although there will be more coming on in the next couple of years. There’s more coming on right now.
However, most of that silver is produced as a byproduct in the mining of gold or copper and lead zinc, so that since it’s a byproduct, it’s not responsive to — not very responsive to price changes, because obviously, if you’ve got a copper mine and you get a little silver out of it, you’re much more interested in the price of copper than silver.
So you have 500 million ounces or so of mine production, and you have 150 million ounces or so of reclaimed silver, a large part of which relates to the uses in photography.
So there’s been a gap in recent years of perhaps 150 million ounces — but none of these figures are precise — which has been filled by an inventory of bullion above ground, which may have been a billion-two, or more, ounces a few years back, but which has been depleted.
And no one knows the exact figures on this, but there’s no question that the bullion inventory has been depleted significantly.
Which means that the present price for silver does not produce an equilibrium between supply, as measured by newly-mined silver plus reclaimed silver, and usage.
And that — eventually something will happen to change that picture. Now, it could be reduced usage, it could be increased supply, or it could be a change in price.
And that imbalance is sufficiently large, even though there is some new production coming on, and there’s the threat of digital imaging that will reduce silver usage, perhaps, in the future in photography.
But we think that that gap is wide enough so that it will continue to deplete inventories — bullion inventories — to the point where a new price is needed to establish equilibrium.
And because of the byproduct nature, which makes the supply inelastic, and because of the nature of demand, which is relatively inelastic, that — we don’t think that that price change would necessarily be minor.
It’s interesting, because silver has been artificially influenced for a long time. You saw that movie about — you know, it was William Jennings Bryan, who was editor of The Omaha World-Herald and a congressman from Nebraska — and his brother was governor of Nebraska — who was the big silver man.
And they used to talk 16-to-1. The 16-to-1 ratio, I think, goes back to Isaac Newton, when he was master of the mint. Charlie will know all about that, because he’s our Newtonian expert here. But that ratio had kind of a mystical significance for a while. Didn’t really mean anything.
And in 1934, the government passed an act called The Silver Purchase Act of, surprisingly, 1934, which set an artificially high price for silver at that time, when production and usage was much less.
And the government, U.S. government, ended up accumulating two billion ounces of silver. Now, this was at a time when demand was a couple hundred million ounces a year, so you’re talking ten years’ supply.
So there was an artificially high price for a while. By the early 1960s, that became an artificially low price of $1.29, and at that time I could see the inventories of the U.S. government being depleted, somewhat akin to what inventories are being depleted now.
And despite the fact that Lyndon Johnson and the administration said they would not demonetize silver, they did demonetize it, and silver went up substantially. That was the last purpose we had of silver, but I’ve kept track of the figures ever since.
The Hunt brothers caused a great amount of silver to be converted into bullion form, including a lot of silver coins. So they, again, increased the supply in a very big way by their action in pushing the price way up to the point where people started melting it down.
So you had this — dislocations in silver over a 60-plus year period, which has caused the price to be affected by these huge inventory accumulations and reductions.
And we think right now that — or we thought last summer when we started buying it — that the price we bought it, that that was not an equilibrium price, and that sooner or later — and we didn’t think it was imminent, because we don’t wait till things are imminent.
You know, we were going to buy a lot of silver. We didn’t want to buy so much as to really disrupt the market, however. We had no intention of replaying any Hunt scenario. So we wanted to be sure we didn’t buy that much silver. But we liked it.
Charlie?
CHARLIE MUNGER: Well, I think this whole episode will have about as much impact on Berkshire Hathaway’s future as Warren’s bridge playing. (Laughter)
You’ve got a line of activity where once every 30 or 40 years you can do something employing 2 percent of assets. This is not a big deal for —
WARREN BUFFETT: No.
CHARLIE MUNGER: — Berkshire. The fact that it keeps Warren amused and — (Laughter)
WARREN BUFFETT: Yeah, I do like —
CHARLIE MUNGER: — and not doing counterproductive things — (Laughter)
WARREN BUFFETT: It makes me feel good about — it makes me feel better about all those pictures that people take over the weekend. (Laughs)
They all use a little bit of silver. (Laughter)
CHARLIE MUNGER: At least it shows something that teaches an interesting lesson. Think of the discipline it takes to think about something for three or four decades, waiting for a chance to employ — (laughter) — 2 percent of your assets.
I’m afraid that’s the way we are. (Laughter)
It means there’ll be some dull stretches.
WARREN BUFFETT: Right. Yeah, it’s less than a billion dollars in silver. It’s $15 billion in Coke. You know, it’s a —
CHARLIE MUNGER: It’s a non-event.
WARREN BUFFETT: It’s 5 billion in American Express. I mean it is close to a non-event, but if you see it there — you know?
CHARLIE MUNGER: At least it shows the human personality at work. (Laughter)
Very peculiar personality, I might add. (Laughter)
WARREN BUFFETT: Reinforced by a partner.
CHARLIE MUNGER: Yes. (Laughter)