Warren Buffett is famous for many things one of which is his general dislike for precious metals as an investment. But maybe you’re old enough to remember when, just over 20 years ago, he backed up the truck and bought a ton of silver – over 3,000 tons, to be more precise. From the 1997 Berkshire Hathaway letter to shareholders:
Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal’s fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand.
Maybe you’re even old enough to remember that earlier time, just about 50 years ago when the Oracle of Omaha amassed a position in silver. Either way, it’s interesting to look back at why he did so. “Demonetization by the U.S. Government”, was his thesis back in 1967. Essentially, he made a bet on the devaluation of the dollar against the gold price and chose silver as his trade vehicle. And there are some interesting parallels between then and today.
The dollar is no longer convertible into gold as it was back then but the dynamics that forced the discontinuation of this convertibility are still at work. Wikipedia discusses the “Nixon shock” by explaining that, “from 1950 to 1969, as Germany and Japan recovered, the US share of the world’s economic output dropped significantly, from 35% to 27%”. The very same situation is happening again today, only it is China taking a share of the world’s economic output even as the dollar remains the world’s reserve currency.
