THC,
Like you, I have been trying to figure out why Buffet would be interested in silver. I read a biography on him recently, and apparently there are two basic tenets that he adheres to when investing: invest in a company that has a "franchise", and dealing in a form of arbitrage. His silver investment may fall into this latter category, although I still cannot pigeonhole it according to the example that the book gave.
"Franchise": He looks for a company that can take an ordinary product and turn it into a franchise. Berkshire Hathaway's investment in Coca-Cola is a classic example of this. Coca-Cola uses sugar, water, and a few other common ingredients to make a highly profitable product. There are many competitors and substitutes, but Coca-Cola remains a "franchise". A second example is Geico Insurance. They took an ordinary product (insurance), marketed it to a select group of people (government employees), and were making great profits due to the lower-risk profile of the customers.
Arbitrage: Although I cannot remember the exact description of this term vis-à-vis how Buffet uses it as an investment tenet, it is not the usual term that we think of about buying an item on one market and selling it on another for a higher price. The example given in the book was a forestry company. They had some land confiscated by the government, yet the compensation was still being negotiated. To further complicate matters the company was being taken over by another, and the bid was for a specified amount of cash and/or shares, plus a certain percentage of the negotiated settlement for the confiscated land. Buffet calculated that the cash/share offer was a good value for the existing company, and that the settlement for the land should be a lot higher than the market anticipated. He made a killing on this arbitrage opportunity.
How does silver fit into either of these two categories? I really can't figure it out yet. Hopefully this little bit of background will help initiate some discussion though.
Neil.
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