Looks great closed at 23.5c in Frankfurt last night. enclosed transcript of Warren Buffets explanation of why he bought 130 million ounces of silver
I had a question about the silver purchase last year. When you announced it, you said that the supply and demand fundamentals would be established at a higher price. What are the fundamentals? Buffett: We have no inside information about great new uses for silver or anything of the sort. You can see from looking at the numbers that aggregate demand, primarily from investor and fundamental type uses, is close to 800 million-plus ounces a year, and there are 500 million or so ounces of silver being produced annually, although there will be more coming on in the next couple years. Most of that silver is produced as a by-product in the mining for copper, lead or zinc. Since it's a by-product, it's not very responsive to price changes.
There's been a gap in recent years of perhaps 150 million ounces, which has been filled by inventory bullion above ground, which may have been a billion or two or more ounces a few years back. 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 uses. And eventually something will happen to change that. I figure it could be reduced usage, increased supply, or change in price. That imbalance is significant, even though there is some production coming on and some digital imaging that will use silver that is targeted. We think that the gap is wide enough so that it will continue to deplete bullion inventories to the point where a new price is able to establish equilibrium. We don't think that price change will necessarily be minor.
It's interesting because silver has been artificially influenced for a long time. In 1934, the government passed an act called the Silver Purchase Act, which set an artificially high price for silver at that time when production was much less, and the US government kept 2 billion ounces of silver. This was a time when demand was 100 million ounces a year. There was an artificially high price for a while.
By the early 1960s, that became an artificially low price at $1.29. And at that time I could see the inventories of the US government being depleted somewhat akin to how they're being depleted now and despite the fact that the Lyndon Johnson administration said they would not commoditize silver, they did commoditize it. That was the last purchase that we had of silver and I've been watching it ever since.
The Hunt brothers caused a great amount of silver to be converted into silver coins. They again increased supply in a very big way by their action in pushing prices way up to where people started knocking it down .
There have been dislocations in silver over a 60-plus year period, which has caused the price to be affected by these huge inventory accumulations and reductions. We think right now--we thought last summer when we started buying it--that the price we bought it at was not an equilibrium price, but would be sooner or later.
Munger: I think this whole episode will have about as much impact on Berkshire Hathaway's future as Warren's bridge playing. It's an activity where once every 30 or 40 years you do something and employ 2% of assets. This is not a big deal for Berkshire. To the extent that it keeps Warren amused, and he's not doing counterproductive things, it's a good thing.
Buffett: This makes me feel good about all the pictures people took this weekend. We can all use a little bit of silver.
Munger: It teaches an interesting lesson, the discipline it takes to think about something for 3-4 decades, then wait for a chance. That's the way we are.
Buffett: It's (Berkshire's position is) less than $1 billion in silver, it's $15 billion in Coke, it's $5 billion in American Express. It is close to a non-event.
MMN Price at posting:
0.0¢ Sentiment: ST Buy Disclosure: Held
