Buffett's Berkshire Hathaway said last week he purchased 130 million ounces of the precious metal now worth $910m (pounds 535m). He bought zero-coupon US Treasury bonds in September, which gained as Treasury yields fell.
Buffett has a reputation for being someone who looks for long-term investments in well-run companies. He hasn't been known as a commodity investor before. "Buffett looks for value anywhere and everywhere he can find it," said Stevin Hoover, chief executive of Hoover Capital Management in Boston, who devotes $16m of the $80m he manages to Berkshire shares.
Finding value in the market has grown more challenging since the latest bull run. The Dow Jones Industrial Average has gained about 45 per cent since Buffett, in the spring of 1996, warned that the stock market had become expensive.
Buffett isn't shunning stocks altogether, though. At roughly the same time he began to buy silver and bought the zero coupon bonds, he increased his stake in Wells Fargo to 9 per cent. Still, while the market hovers at all-time highs, investors expect Buffett to keep seeking out fresh investment ideas.
"He's got to have a heck of a time right now finding ways to put money to work in the stock market," said Eugene Gardner, chief executive of $1.5bn Gardner Investments in Pennsylvania. Gardner has been a Berkshire investor for the past 20 years.
In addition to seeking alternatives to the stock market, Buffett needs to invest the millions of dollars in profits from Berkshire's Geico insurance unit. He has ventured beyond stocks before. In 1983 and 1984, Berkshire bought about $140m of Washington Public Power Supply System bonds whose price had slumped when the power authority defaulted on $2.2bn of bonds to build other projects. He also owned bonds issued by Texaco near the time it sought bankruptcy protection in 1987.
Buffett's timing has been good lately, Hoover said. "Buying silver is a shrewd move for him. It is part of Berkshire's move to hedge its stock portfolio." Demand by manufacturers for silver has surged, mostly in the photographic industry, as inventories dwindled.
Coeur d'Alene Mines chief executive Dennis Wheeler estimates that world demand for silver from the photography, jewellery and electronics industries outstripped mine production by 150 million ounces "every year over the past three years".
Hoover said Buffett probably bought most of the silver at an average price below $5.50 an ounce. Since then, silver has surged to $7.93 an ounce, most of the rise coming in the last two weeks. The price is now at its highest in 10 years.
The disclosure of the purchases means that other investors are more likely to believe the rally can be sustained. Buffett is seen as more of a long- term investor than a speculator likely to sell any time soon.
"Buffett is sending a very encouraging message by establishing this position," said Wojciech Zielinski, executive director at KGHM Polish Copper, Europe's largest silver producer. "It indicates he believes silver is a good long- term prospect."
Some investors had previously alleged the silver market was being manipulated as they watched the stockpiles reported by Comex, the New York exchange, drop by 49 per cent to 103 million ounces, its lowest for more than 12 years and less than Berkshire Hathaway's holding.
In the most famous attempt to corner the silver market, Texas businessman Nelson Bunker Hunt and his brother William Herbert acquired more than 100 million ounces in the late 1970s, driving the price to an all-time high of $50.35 an ounce in 1980. A collapse in the price forced the billionaires into the bankruptcy court. The Hunts' strategy failed because the rise in the price brought private stores of silver pouring into the market, and production expanded rapidly.
Users of silver are likely to be hurt by the higher silver price. "These companies are going to have to bear the brunt of this - it definitely adds to their costs and squeezes their margins," said Ralf Drieselmann, head of precious metals trading at Degussa, which supplies silver nitrate to the photographic industry.
He said there isn't an actual shortage of silver, though the banks and investors who usually lend silver are holding it back from the market. "You can get silver, it's just expensive," he said.
Investors know to expect the unexpected from Buffett, and the larger his $65bn company grows, the less he'll be able to keep his strategies secret. One investor familiar with Buffett's style said he expects him to keep investing in the industries he has holdings in - food, beverages, and financial services. "He doesn't care if the stock market stays at 8000," said Robert Hagstrom, author of The Buffett Way. "He likes to buy companies that get out of favour."
What's certain is that "as things change, he will probably be three steps ahead again, while other investors walk around in a fog," Gardner said.
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