Buffett and Silver

Special Report from Stone Investment Group 2003

Does Honest Money influence Mr. Warren Buffett?
Mr. Warren Buffett’s father was an advocate of Honest Money. Representative Howard
Buffett, father of Wall Street legend Warren Buffett, was too far ahead of his time, so few
listened to the concerns and even fewer appreciated his wisdom when he addressed a
group of businessmen on May 4, 1948.
Quote..
"Today Congress is constantly besieged by [special interest] groups seeking benefits
from the public treasury. Congressmen find it difficult to persuade themselves not to give
in to pressure groups. With no bad immediate consequence it becomes expedient to
accede to a spending demand. The Treasury is seemingly inexhaustible. Besides the
unorganized taxpayers back home may not notice this particular expenditure - and so it
goes."
"Because [a politician's] continuance in office depends upon pleasing a majority of the
pressure groups," there is a natural propensity for over-spending. Rep. Buffett recognized
this reckless tendency to be a political fact of life, with predictable and discouraging
results if left uncontrolled. "From 1930-1946 your government went into the red every
year and the debt steadily mounted. Various plans have been proposed to reverse this
spiral of debt."
"One is that a fixed amount of tax revenue each year would go for debt reduction.
Another is that Congress be prohibited by statute from appropriating more than
anticipated revenues in peacetime. Still another is that 10% of taxes be set aside each year
for debt reduction." "All of these proposals look good. But they are unrealistic under our
paper money system. They will not stand up against post-war spending pressures. The
accuracy of this conclusion has already been demonstrated."
Mr. Buffett Actually Cornered the Silver Market before 1997
Mr. Buffet has liked silver for a very long time and this “purchase” was known among a
very few precious metals followers.
When Warren Buffett was associated with Solomon Brothers, the #1 trader nearly
cornered the silver market by paying 20 cents more per ounce than anyone else. There
were several expiring options that were out of the money. Everyone thought that these
were expiring worthless, until the holder (Solomon Brothers/Buffett) decided to exercise
the options at the strike price they held.
The next step was to simply take delivery of their silver. It should be that simple,
especially in a free market. That of course is one of the BIG LIES about the silver
market; it is not exactly a free market.
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The dealers and Wall Street firms that held most of this silver ran to the U.S. Government
and asked for relief from delivering what Solomon and bought and PAID for. Since there
was not enough silver available, the rumor was that the government asked to meet with
Mr. Buffett in private. Buffett backed down and the government made sure that Solomon
did not lose any money. The government was willing to settle this embarrassing situation
and pretend that the free market in silver still exists, when in fact is does not.
Buffett goes for the Silver Again
Warren Buffett’s most recent silver purchase started in the summer of 1997 and
continued for several months. The lowest price on the COMEX during that time frame
was around $4.40. The market recognized this in February of 1998 and silver advanced to
over $6.50 an ounce. Mr. Buffett took delivery of about 90 million ounces of silver and
gave the dealers more time to deliver the rest.
It is my strong opinion that Mr. Buffett leased out the remaining 40 million ounces.
Why do I make this assertion? Because, I have studied the annual report of Berkshire
Hathaway which states the following:
"Line item 53. Mi scellaneous items. 400,000,000$"
Now it was widely reported that Mr. Buffett bought 129 Million ounces. However,
unless you were really alert you might have missed the fact that only 90 million ounces
were delivered.
So silver at $4.40 (spot price at the time of the annual report) times 90 Million ounces is
about equal to the $400 million dollars reported in the annual report. I think Mr. Buffett
leased out the 40 million ounces and wouldn’t it be nice if Mr. Buffett asked for his silver
to be returned in the middle of 2003, just about the time I see this market beginning a
major move to the upside.
Another question we must ask is would Mr. Buffett lease out any of his silver? The first
question, is self evident, to be nice to the “dealers” and knowing that Mr. Buffett once
was asked to “cool it” in the silver market, why not be very accommodating this time
around. He most likely let the dealers off the hook by leasing part of his holdings.
Secondly, Mr. Buffett does not like investments which are static and do not throw off
any type of return such as a dividend. This would be added incentive for part of the silver
to be leased. Mr. Buffett would earn a return on investment and the “money” would be
working to produce income. Finally, by putting some of the silver at risk, it provides a
method to relieve pressure that might come in the future.
Let us suppose that at the end of 2003, the silver market is very tight. Some in the
financial community might recall that Mr. Buffett bought all that silver. It would be
extremely beneficial if Berkshire Hathaway made the public statement that some silver
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had been leased and was not being returned. This might go a long way in relieving any
political pressure that might appear.
My point is Warren Buffett knows as much as anyone about sound money and the
potential for silver. He also is aware of the problem that dealers might some day have
obtaining the rest of his silver purchase. So we know Buffett has loved silver for a long
time, when he did make his purchases he moved the silver outside the jurisdiction of the
U.S. for a very good reason. If there is any type of U.S. action taken in the silver market,
Berkshire Hathaway’s silver is safely stored in London, outside U.S. jurisdiction.
What this means to us is we need to be certain of our core holdings. We need to take
delivery of most or all of the silver we hold as a core position. If you have some amount
of silver that you trade or speculate with fine, which is not what I am addressing here. Do
you need to go as far as moving it outside the jurisdiction of the U.S.? I doubt it, but it
does cause one to think.
Who can you trust?
This is from The Times (Mercer County, New Jersey) over two years ago.
Making a case for his innocence will be tougher for jailed financier Martin A. Armstrong
now that a futures trading company admitted it conspired with him in a $3 billion
international fraud and agreed to pay victims a $606 million settlement. The payout by
HSBC Holdings of Manhattan -- one of the largest such settlements in U.S. history --
constitutes a strong admission of guilt in the corporate world, where companies seldom
yield money without a struggle.
The entire silver market on the COMEX represents 500 million or ½ billion dollars. Here
we have a fraud that is six times that amount. In fact if we take the high estimate of 500
million ounces of silver in known and unknown inventories, the total dollar amount
would be $2.5 billion, less than the $3 billion taken by Armstrong and his chums.
With all that is going on in this less than honest financial system I recommend that
anyone involved with HSBC get some type of verification that their silver and/or gold is
safe. Remember, HSBC is responsible for almost 60% of the total amount of COMEX
inventory.
By the Way, MONEX uses HSBC to “HOLD” silver for their clients, enough said.
Silver Leasing
In January 2002, the one month lease rate for silver went to 29% according to Kitco. It is
important to understand what this means. First, the indication is that silver being leased in
January will bring the highest yield to the lender. In other words, if you lease your silver
during January 2002, you would receive 29% on an ANNUAL basis. A 30 day lease
means just that; the metal needs to be returned in 30 days. However, this rarely happens,
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as the metal loans are rolled-over almost every time. This is a huge problem because
these rollovers continue to encourage the lender to turn real silver into "paper silver" and
profit on a yield. This continual putting off the day of reckoning, when very little silver is
available, is getting close. My point is simple silver not gold will become the metal
exhibiting a shortage. Yes, the fundamentals for gold do show more demand than supply,
but there is still a large supply to draw upon, this just is not the case with silver.
A merchant bank member contacted me recently to discuss the silver leasing situation
with me. It was admitted that most leases are in fact rolled over. I was also told that the
amount of loaned silver is not as great as reported by GFMS. The point was also made
verbally that the contract could be settled in dollars and not in silver. I want to be very
accurate to my readership, I have never seen a silver lease contract, and therefore it is
possible that the silver lease contracts are written to include an escape clause that the
contract would be settled in currency not in silver. I also want to be clear that legally this
is hear say, I do not have it in writing and therefore this would not be admissible to a
court, however the point is clear. To my thinking this just makes it that much clearer that
your core position of silver be held by yourself.
The London Market January 2002
The silver market continues to be dramatically affected by the lack of silver for
unallocated stocks in London. Silver lease rates rose sharply again last week, the forward
market liquidity contracted sharply, and options prices rose to prohibitively high levels.
Meanwhile, there has not been a major draw down of inventories in London and Zurich.
There has been metal that has shifted from unallocated to allocated stocks. There may
have been some slowing in the rate of metal flowing into inventories, which would have
reduced total stock availability. Rumors meanwhile continue to circulate in the market.
Most appear wrong.
There is no indication that Berkshire Hathaway has been involved in any shift of metal
from unallocated stocks to its allocated inventories. Every indication is that Berkshire’s
metal remains untouched throughout this. There also are indications that Berkshire
Hathaway has not been lured into leasing any of its metal out into the market, at least yet,
even by silver lease rates that approached 40% last week. This is consistent with the
statements the company made in 1998 about its silver inventory intentions. It also is
consistent with the company's stated views about silver, the silver market, and
management of investment positions overall.
The actors appear to be one or more major bullion dealers. Whether they are acting on
their own proprietary account or on behalf of others is unknown, although the evidence
suggests that they are doing it for their own account. Their motives remain undisclosed at
this time, and the subject of much speculation. Concerns in the market are that the silver
market is vulnerable to suffering the long term loss of liquidity and market viability that
platinum and palladium have suffered over the past three years, with the collapse of the
forward and options markets leaving those markets vulnerable to heavy manipulation by
a few large participants.
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This commentary taken from the financial press at the time, does contradict my premise
that some of Buffett’s silver was leased out. I want to present both sides, because it is
important to present both views to this readership.
Over the Counter metals leasing
Dianne Feinstein, a Democrat, proposed legislation that would give the U.S. Commodity
Futures Trading Commission regulatory oversight of all energy and metals derivatives to
better track large trades in the highly secret over-the-counter market and to respond
faster to any illegal activity in the market.
This statement on the public record of highly secret over the counter transactions is
something to give your utmost attention. It is not easy to obtain any reliable information
on how big the OTC metals activity has been the last several years but to have a high
public official acknowledge it, presents strong evidence that the politics involved are
important. I would urge anyone so inclined to write to their Congressmen and ask a
simple question. Do hedgers in any commodity have to be producers by law? This is just
one area of concern.
Hedging vs. Leasing
A hedger is given different margin requirements than a speculator. After all, a producer
has the commodity, whereas the speculator does not. The risk is supposed to be taken by
the speculator and the “hedged” profit is locked in by the producer. Since it is a well
established fact that very few if any of the primary silver producers hedge (why do so at a
loss or break even?), then what producers are short? Barrick Gold for one is short,
approximately five years of silver production the last time I checked. Perhaps some of the
byproduct producers are also short. It is very important to understand that there are two
distinct issues. One is short selling or “hedging” in the Futures market and the other issue
is leasing.
Leasing or Borrowing has been discussed at length by Ted Butler and I am sure most of
you are familiar with his work. My point is that the amount borrowed and hedged is
enormous. The paper (Futures) positions can be covered and most likely will be at some
time in the future. Will this have an explosive impact on the price? It will have an effect,
but how big I am not sure because large positions can be put on and off in the commodity
pits rather easily. Yes, it will have an impact. The short trap is certainly possible but is
not the main factor in my analysis only a contributing fact.
I do want to be clear before I move on, the paper position ( Futures Market) is
responsible for the price action, but since the market is mostly settled in cash it will not
ultimately have the impact that the physical silver market will have. Why? Because
some amount of silver has been borrowed, how much? Perhaps as much as a billion
ounces maybe more.
Quoting from the Gold Fields Mineral Services study 2001 page 31.
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“Some formerly allocated metal held by one or more private investors was lent into the
market. This may have included a portion of Mr. Buffett’s holding. Secondly, part the
silver exported by China was not sold but was lent out. So now we have verification
from one of the top annual studies of the silver market, the one the Silver Institute
sponsors, and both Mr. Buffett and China have most likely “leant” some silver into the
market.
This quote is important for the following reasons. It verifies that Mr. Buffett has loaned
some silver and that leasing does exist. Secondly, that “leasing” continues in the market
and the lenders might be willing to loan silver at a low price but certainly not sell at a
low price.
Think about it, if you really believed that you could get a return on your passive
investment (silver) and get it back why not? It is like having your cake and eating it too, a
small return (unless we take the 29% yield of January) and getting your investment back
intact. The problem is will the real silver be returned? It is very doubtful. More has been
loaned out according to GFMS that their study indicates exists.
A Final Note
A final point, I have never seen a leasing contract. It is possible that the “loan” can be
settled on a cash only basis rather than in metal, I do not know. If for example Mr.
Buffett has loaned out the 40M ounces I wrote about, how would he write the contract?
Would Berkshire Hathaway expect spot price + some premium if the silver could not be
returned? Mr. Buffett knows insurance as well as anyone, and the insurance business is
all about risk. The risk in the market place overall is incredible and it is quite a task to
separate the wheat from the chaff.
Conclusion
You now know more about Warren Buffett and his silver holdings than nearly anyone
else. Tell your friends and spread the word, silver represents an opportunity that
Berkshire Hathaway saw a long time ago. Silver is one of the most overlooked and
unnoticed investments, yet offers an opportunity to profit that few other investments can
match.
Be smart, follow Buffett’s lead, buy real metal first, once that is accomplished then you
can move into different types of precious metals investments.