In the last leg of a bear market, silver often does not fall as much as gold (which is why the gold:silver ratio doesn’t rise anymore).
Since silver is a much smaller market than gold, it is easier for one single player to heavily impact silver’s price than gold’s price. For example, the Hunt brothers sucked up silver supplies in the 1970s, which is why silver made a massive flat bottom while gold prices kept on falling.
Warren Buffett did something very similar in 1997. By 1997, Buffett realized that silver’s mining supply had been shrinking for almost a decade. From a long term perspective, he figured that silver prices’ bottom could not have been far.
Buffett bought almost 130 million ounces of silver between July 25 1997 and January 12 1998, paying around $680 million (approximately $5.25 per ounce). Although this only accounted for only 2% of Berkshire’s portfolio, it was estimated to equal 1/3 of the world’s silver inventories.
Berkshire normally should have disclosed Buffett’s silver buying in its annual report (in March 1998). But ever politically savvy, Buffett sent out a press release on February 3 (after he finished buying) because he did not want to be accused of “manipulating silver prices”. You can read the press release here.
As you can imagine, silver prices bottomed in July 1997, just as Buffett started buying. It started rising slowly but steadily in the ensuing months. It took a brief pause in January 1998, just as Buffett stopped buying. The moment Buffett’s press release became public, silver soared for 3 consecutive days from February 3 – 5, 1998.
It was clear that Buffett’s buying was the only cause of this rally. During this time, gold slowly slide down to new bear market lows. Silver and gold typically move in the same direction, although their magnitude is different.
In the early 2000’s, large banks and “smart money” continuously tried to short silver. This is typical of the early stages of a bear market. For some reason the commercial hedgers (as defined in the COT report) and “smart money” keep trying to push down the price of silver while the real savvy long term investors accumulate massive long positions.
Buffett sold all of his silver in Q1 2006, during the spectacular silver runup that ended on May 11. Warren Buffett announced at his annual shareholder meeting on May 7 that he had sold all his silver, just before the top (and subsequent crash). Buffett’s announcement played a role in silver topping in May 2006, although there are more important reasons from a technical analysis standpoint.
There are 2 reasons why Buffet sold all of his silver:
- The “official” reason. Buffett saw “bubbly characteristics in the price of silver, which was rising like crazy”.
- The “unofficial” reason, which seems more likely. Buffett was being investigated by the government in 2005 because his reinsurance company General Re had engaged in illegal transactions with AIG. AIG’s CEO was forced to step down but Buffett left unscathed. Why was Buffett let off easy? Some say that Buffett sold his silver immediately after meeting with federal “investigators”. Keep in mind that inflation was high in 2006, so the U.S. government was afraid of another silver spike like that of 1980 (which would have caused inflation to rise even more). Thus, there’s a chance that the U.S. government let Buffett off the hook in exchange for not running up silver prices.
It’s worth noting that the popular silver ETF SLV began trading in May 2006. A major concern at the time was “where would SLV get the physical silver to back up its shares”? Another question is “why did Buffett’s sudden selling not cause silver prices to fall in Q1 2006”? SLV had exactly 130 million ounces of silver, and Buffett sold 130 million ounces. Putting 2 and 2 together, it’s likely that Buffett sold the silver directly to SLV, thereby allowing him to sell without putting any downwards pressure on the price.