Warren Buffett Trashes Gold, But What About Silver?

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“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”-Warren Buffett

In a recent Fortune article, Warren Buffett provided a glimpse into his upcoming annual shareholder letter.  Buffett used this opportunity to once again remind everyone how much he dislikes gold.  He cites gold’s limited industrial demand and places the precious metal in a category of assets that “will remain lifeless forever.”  However, there are two precious metals that are considered to be monetary safe-havens.  Sometimes referred to as gold’s little brother, silver has also acted as a hedge against uncertainty and fiat currencies.  Furthermore, its industrial use is far from being lifeless.

Buffett paints another analogy of the world’s gold stock as a useless cube that would fit within a baseball infield.  At $1,750 per ounce, this pile of gold would be worth $9.6 trillion.  He then visualizes another pile where as an equal amount, you could buy all U.S. cropland, 16 Exxon Mobils and still have $1 trillion left over for “walking-around money.”  He wonders what investor with $9.6 trillion would select the gold pile over the latter.  While Buffett’s thinking about gold is somewhat understandable, he continues to omit silver from the conversation.  Maybe Buffett is still sour from his past venture into the most conductive metal known to man?

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Beginning in 1997, the legendary value investor reportedly purchased a whopping 130 million ounces of silver between approximately $4.50 and $6 per ounce.  According to Silver Monthly, from 1997 to 2006, Buffett’s investment fund-Berkshire Hathaway-accumulated over 37 percent of the world’s known silver supply.  At Berkshire’s annual shareholder meeting, Buffett was asked about the fund’s silver investment.  He said, “We had a lot of silver once, but we don’t have it now, and we didn’t make much on our prior holdings.  I bought early and sold early.”  Although silver trades near $30 an ounce today, Buffett sold his position near $7.50 an ounce.  There is heavy speculation as to why Buffett sold his position, but the underlying reasons for holding silver have not changed.  In fact, the reasons for building a position in silver continues to grow.

Like gold, silver offers a way for investors to hold real money.  Unlike the U.S. dollar and other fiat currencies, it can not be devalued by quantitative easing programs and other inflationary policies.  In the Fortune article, Buffett himself notes that “the dollar has fallen a staggering 86 percent since 1965…it takes no less than $7 today to buy what $1 did at that time.”  Even if precious metal critics overlook the real money component of silver, there are numerous industrial uses for silver.  Silver’s unique properties of strength, malleability, reflectivity and conductivity make it an extremely useful metal around the world.

Silver is used in everything from automobiles to alternative energy needs.  Almost all electronics are configured with silver.  According to The Silver Institute, over 36 million ounces of silver are used annually in automobiles.  Simple functions such as starting the engine or operating power windows and seats are all activated using a silver membrane switch.  Alternative energy sources also have a need for silver.  Silver paste is used in 90 percent of all crystalline silicon photovoltaic cells, which are the most common type of solar cell.  Over 100 million ounces of silver are projected to be used on these solar cells by 2015.  Buffett, who is known for driving himself everywhere and recently investing in solar energy, should be able to appreciate these uses for silver.

Silver also has a variety of medical uses, as it is used in medical appliances as an antiseptic and disinfectant.  Physicians use dressings containing silver sulfadiazine or silver nano-materials to treat external infections, because silver kills bacteria in external wounds.  Silver is even used in breathing tubes, catheters, X-ray machines and odor resistant socks.  More recently, researchers from the University of Leeds published results that showed silver compounds are as effective at killing certain cancer cells as a leading chemotherapy drug, Cisplatin.  The silver compounds were also found to have fewer side effects.

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Instead of providing investors with more colorful analogies about gold being lifeless, perhaps Buffett will shed some light on the many benefits that silver provides to everyday life.  According to data from The Silver Institute, industrial silver demand increased from 350 million ounces in 2001 to almost 500 million ounces in 2010.  This excludes the declining photography uses for silver.  As technology advances, additional uses for silver are likely to be found.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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