Did Buffett Make a Losing Bet on Silver?
Warren Buffett, the second-richest man in the U.S., may have gotten it wrong when his Berkshire Hathaway Inc. spent about $650 million buying silver.
The Berkshire chairman revealed a year ago that the company had bought 129.7 million ounces of silver -- equal to a quarter of the world's annual output. He was betting that demand would outpace production, as it had for years, and send prices higher. Since then, silver has fallen almost 15 percent.
Commodities are an unusual asset for Buffett to hold. The 68- year-old investor, whose 40 percent stake in Berkshire is valued at $36.7 billion, got rich by investing in stocks of companies such as Coca-Cola Co., Fannie Mae and Gillette Co.
''Buffett made a serious mistake,'' said Martin Armstrong, the biggest individual silver trader on the New York Mercantile Exchange and chairman of Princeton Economics Institute, an economic forecaster. ''How many more billionaires will it take to push silver higher? The demand just isn't there.''
The Omaha, Nebraska-based Buffett hasn't said what he's done with the silver horde -- or even if he still owns it. A spokesman for the company declined to comment. If he does, the investment has fallen short of the returns investors have come to expect from him.
Mutual Fund Better
Buffett bought silver when it averaged $5.06 an ounce on the New York Mercantile Exchange. Based on that average, he'd earn 11.7 percent on his investment if he sold it all now. Buffett could have earned 40 percent in the same period by buying shares of a mutual fund that mimics the Standard & Poor's 500 index.
To be sure, his investment has become more profitable in the past month -- silver reached a six-month high of $5.81 last Friday before closing at $5.642 an ounce, down 11.8 cents. Still, with weak economies in Asia and less demand for luxury items, such as jewelry, prices probably won't go much higher, and could fall, analysts said.
''Even though the fundamentals for silver haven't changed in the past year, the outlook has, and it's weakened,'' said Dinsa Mehta, global head of commodity risks at Chase Manhattan Bank in New York. This year, silver belongs in a range of $4 to $6 an ounce and ''not any higher,'' Mehta said.
Owning a commodity isn't like owning a stock. Silver doesn't pay a dividend, and Buffett's big investment won't influence silver supply or demand the way it would a company's management. About the only way commodity speculators make money is by selling at prices higher than the initial investment and storage costs.
Chances are Buffett hasn't sold his stake yet because any large sale during the past year would have been conspicuous, traders said.
''Once there's a big player in such a small market, if he ever turns a seller, it seems that the market is finished,'' Armstrong said.
Berkshire will disclose the value its investments, including silver, by mid-March, when the company publishes its annual report. While Berkshire probably hasn't lost money on silver, investors who followed Buffett into the market probably were the most hurt.
Another Hunt?
Buffett started buying July 25, 1997, a week after prices reached a four-year low of $4.145. By yearend, inventories monitored at U.S. exchanges had dwindled 37 percent and traders guessed supplies were being shipped to London, where warehouse stockpiles aren't disclosed. Silver rose to $6 an ounce.
Shrinking inventories sparked speculation that silver was being manipulated. Traders were convinced someone was cornering the market, as in 1980, when the Hunt brothers of Texas tried. Phibro Inc., a unit of Salomon Smith Barney Inc., caught much of the flak.
Buffett disclosed he was the buyer on Feb. 3, after a trader sued Phibro, accusing the firm of manipulation. The next day, silver closed at a nine-year high of $6.615 an ounce and jumped to $7.50 two days later as some investors concluded Buffett was right.
''Everyone was relieved,'' said John Simko, chairman and chief executive of Sunshine Mining and Refining Co., a Boise, Idaho-based silver producer. ''After all the speculation about manipulation, if anyone was going to buy silver, you'd want it to be long-term player like Buffett.''
Some investors figured silver would shoot up to $10 an ounce. Problem was, Buffett wasn't acquiring any more silver. He made his last purchase on Jan. 12, 1998, according to Berkshire Hathaway's annual proxy statement, filed with the Securities and Exchange Commission three months later.
Without a big buyer, silver began to fall. It reached $4.585 two months ago, the lowest since September 1997 and 39 percent lower than the high reached after Buffett's announcement.
Big Stake
Berkshire's silver investment is just 2 percent of its assets, ''but it's a big stake for the silvermarket,'' said Armstrong, the silver trader. ''He was buying silver on price dips. That works in stocks, but not in commodities. People ran the price up, let it slip, wait for him to buy and run it up again. Now he's basically stuck with silver.''
Buffett's investment is profitable, at least on paper. In an SEC filing, Berkshire Hathaway said the 111.2 million ounces of silver it held at the end of 1997 was worth $97.4 million more than the company paid. Buffett also has loaned some of his holdings, charging borrowers interest. With one-month interest rates on silver below 4 percent, returns from lending fall short of those from other Berkshire assets.
''Buffett's bet hasn't paid off so far,'' said Andrew Kilpatrick, a stockbroker in Birmingham, Alabama, who wrote Of Permanent Value: the Story of Warren Buffett. ''Buffett's a long- term investor and usually takes a stake in something for five to 10 years. There are many investments that he's had for 25 years, so holding silver for a year is like a day-trade for him.''
Even a losing investment would do little to curb Buffett's returns. Berkshire Hathaway stock rose 34 percent on average during the past five years, compared with 25 percent for the S&P 500. It closed last Friday at $71,600 a share, down $300.
Lower silver prices could prompt some mines to reduce production. Companies with high operating costs, such as Denver- based Apex Silver Mines Ltd., may curb expansion plans, which could help boost prices, analysts said.
Still, weak currencies in Latin America, which accounted for a fifth of the world's silver production in 1997, could keep mine production costs low in dollar terms, analysts said. And industrial demand for silver could weaken as digital photography replaces traditional silver-based films, which account for more than a quarter of world demand, analysts said.
Some investors aren't sure why Buffett veered from his strong record in stocks to dabble in commodities, though they're not about to abandon Berkshire Hathaway because of it.
''I don't fully understand what happened with silver, but Buffett works in mysterious ways and he's lost more than I have on this,'' said David Carr Jr., president of Oak Capital Management Inc., a money manager in Durham, North Carolina, who owns Berkshire Hathaway Inc. shares. ''But I like to say, in Buffett we trust, all others have to pay cash.''
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