Silver Fine For Buffett; Others Beware Hunt Disaster Of Early ‘80s Should Deter Latecomers

We liked Coca-Cola Co. because he liked Coke. We took a second look at Wells Fargo & Co. because he took another look at Wells Fargo. Now what are we supposed to do? Stock up on silver because investor superstar Warren Buffett has amassed a silver chest worth more than $900 million?

Short answer: Absolutely not. Most of us should sit this one out.

The last time anyone took a shine to silver was the late 1970s and early 1980s when Nelson Bunker Hunt and his two brothers attempted to corner the world silver market. Silver shot up to more than $49 an ounce in 1980 - up from about a $6 low in 1979, according to the Silver Institute, a trade group in Washington, D.C.

The Hunts’ scheme went bust, and silver fell to about $8 an ounce in 1982. By 1991, silver was as low as $3.54.

The white metal has been dull ever since.

But two weeks ago, Buffett’s firm, Berkshire Hathaway Inc., said it owns 129.7 million ounces of silver, or nearly one-fifth of the world’s known supply.

Buffett started buying silver on July 25 because he thought it was cheap, given the supply and demand.

“They often say of Warren Buffett that he’s looking to buy a dollar for 50 cents,” said Stevin Hoover, chief executive officer of Hoover Capital Management Inc. in Boston.

Already, Buffett’s move has proven to be shrewd. Silver prices gained about 60 percent since July. Two weeks ago, after the news of Buffett’s holdings, silver shot up to about a 10-year high at more than $7 an ounce.

Hoover, whose firm has about $15 million invested in Berkshire shares, said he doesn’t think Buffett is out to make a short-term commodities bet. But who knows? Did Buffett buy silver just because he couldn’t pick up a bargain in stocks? Or has he found a silver bullet to a fast buck? It’s clear Buffett can wait this out. His silver represents but 2 percent of Berkshire’s entire holdings.

Buffett isn’t always a long-term investor.

Berkshire, for example, bought 20-year, zero-coupon bonds last year - bonds that pay no interest annually but pay face value at maturity. The value of zero-coupon bonds fluctuates wildly with the rise and fall of interest rates. And bond traders believe Buffett sold off the zero-coupon bonds at huge gains last fall, after long-term interest rates fell.

For most individuals, experts say, it’s probably too late to make money on the news Buffett owns silver.

“Once the average Joe Schmoe, like you and me, finds out, it’s too late,” said W. Howard Morris, president and chief investment officer of WILMOCO Capital Management in Detroit.

Analysts wonder just how high prices for silver can go. If you jump in when silver is trading about $6 or $7 an ounce, some say, there’s a good chance prices could fall back to old, recent levels of $4 or $5 an ounce.

“At this point to go into silver you are taking a substantial risk,” said Edward Hernandez, a broker at A.G. Edwards & Sons.

Billionaire Buffett can afford to play the game. The rest of us are better off limiting silver to our tabletops, and not in our portfolios.