Warren Buffett, the so called Oracle from Omaha, in 1998 bought one fifth of the worlds silver supply. EIS found this curious. In fact we found it downright dumb, given the unfolding scenario of deflation, and commodity price lows likely within the Kondratieff wave trough for 1999, that EIS has been forecasting since 1995. So we commissioned our Political Risk Analyst, Graham E. L. Holton, to do some sleuthing. He reports:

"When Warren Buffett announced in February 1998 that he had purchased 129.7 million ounces of silver over the previous seven months, 20% of the world's estimated annual supply, silver rose by 25% to a 9 1/2 year high. But investors continued to wonder why the canny Chairman of Berkshire Hathaway, America's most famous investor worth an estimated US $16.6 billion, had made such a move given the disastrous consequences of the Hunt brothers who lost US $2 billion in the late 1980s on attempting to corner the silver market.

Silver is usually known as a precious metal, but it is also a very important strategic metal; the new technology of the 21st century will consume ever increasing volumes of silver. In July 1998 the U.S. Department of Energy report 'At the Frontiers of Science: Superconductivity and its Electric Power Applications' announced that a collaborative agreement with several industrial and electricity utility companies costing up to US $47 million had been made to construct High Temperature Superconductor (HTS) cable to power several facilities owned by Southwire Company, the largest cable maker in America.

These HTS wires use silver as a sheath, as it does not react with superconductor powders and is highly electrically conductive, carrying up to five times more current than conventional copper wires. The Chairman of Intermagnetics, Carl Rosner, says that 'So far, silver is the only material that prevents deterioration of the superconducting properties'.

Once the tests are successful the new HTS cables could replace the transmission line grid in the United States, using as much as 1000 kilograms of silver per kilometre. If one includes the application of incorporating HTS technology, the entire U.S. market for superconductor products and services could cost US $200 billion by 2020, with an annual consumption of 30 million ounces of silver, especially as U.S. electricity demand is expected to double by 2030.

Silver will also have greater application to U.S. military systems and satellites. Silver oxide-zinc batteries, called 'button cells' provide 40 watt-hours per pound compared to 14 watt-hours per pound for nickel-cadmium systems. In 1997 1.2 billion button cells were sold worldwide. These batteries have an increasing use in specific requirements of spacecraft, space shuttles, satellites, missiles, rockets, torpedoes and life support systems. Astronauts use these batteries in their space suits and power tools because of their reliability.

Military vehicles with all-electric propulsion systems are powered by rechargeable silver-zinc batteries. Since silver chloride-magnesium batteries are activated when immersed in sea water they have primary military applications.

Silver paste is used in 90% of all crystalline silicon photovoltaic cells which are the most common solar cells. Silicon cells used to power satellites use silver in the form of evaporated metal to make electrical contact. The U.S. consumes 4.2 million ounces of silver to manufacture batteries, while Japan consumes 2.0 million ounces annually.

Over 60% of annual silver production is consumed in industrial uses and photography. According to the Silver Institute demand for silver exceeded mine production in recent years by 104 million ounces, depleting above-ground stocks, while low silver prices has forced a number of mines to shut down production.

According to the commodity analyst, George Kleinman, the COMEX division of the New York Mercantile Exchange warehouse stocks of silver were down to 110 million ounces in February 1998, then a record low. In July silver prices broke through a key price barrier as declining stocks fuelled speculation of dwindling supplies, when COMEX stocks fell to 83 million ounces. If recent silver futures prices are any indication, silver will see rises in the near future. According to Bernie Savaiko, an analyst at Paine Webber, 'Silver seems to be the special situation among the precious metals".

Graham E. L. Holton,
Holton & Associates
Political Risk Analysis
Ph: 9387 5767
Email: gholton@werple.net.au

Thanks Graham. Now Buffett is not the only investor interested silver. One of the leading companies in the North American silver sector is Apex Silver Mines Limited.

This company is rumoured to be attempting to build one of the largest, and most diversified group of silver properties ever put together. Significantly its silver reserves are now the largest in North America. One of its mines, in Bolivia, could develop into the largest silver mine in the world, though that is only speculation at present. The Bolivian mine is not expected to start up until 2002.

Apex Silver Mines has just 19 million issued shares, 20% of which is owned by none other than George Soros' Quantum fund. Another 60% is owned by company officers, Directors, and one Louis Bacon, another hedge fund operator. This is a tight share registry, in a company worth watching.

Finally, two further points about Buffett.

His holding company, Berkshire Hathaway, purchased the huge American reinsurance company General Re. So what ? General Re has an enormous bond portfolio of about US $19 to $20 billion. The purchase therefore reduced Berkshire's proportionate stock market holdings by one fifth. Precisely the right thing to do, at this time in the decade cycle. His timing was June. The US market peak, (so far), was July 1998.

And as has been noted in most newspapers, Berkshire Hathaway's holdings of cash this month are the largest that has ever been recorded by them on a dollar basis, though when measured on a proportionate basis to assets held, cash held has at other times been more significant. Feel tempted to buy a few shares in Berkshire hathaway ? Just one share will set you back a cool $65 000 at current prices.

Hi ho silver and away !