Business Outlook: Sage of Omaha gets a bit of the Bunker mentality

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Warren Buffett makes an unlikely Nelson Bunker Hunt, the last man who tried to corner the silver market. Even so, the Sage of Ohmaha's disclosure that he has amassed 20 per cent of the world's supplies of the Cinderella metal had a predictably electrifying effect yesterday. The London silver price fix was set at its highest level in nearly a decade after shooting through $7 an ounce on the back of overnight Far East trading. As sure as night follows day, copycat buyers will be lured into the market on the basis that what's good for Berkshire Hathaway must be good for them.

The Buffett explanation of this $550m buying spree is as homespun as his investment philosophy. Demand for silver is out of kilter with supply and therefore the best way to rectify this imbalance is to get the silver price up. Berkshire Hathaway has certainly achieved that, helped by the absence of bothersome disclosure requirements. Since it started buying last July, the price has risen from $4.30 a troy ounce to a close of $7.05 yesterday. Mr Buffett is now sitting on just short of 130m ounces of the stuff.

The finger of suspicion for the price rise was already pointing at the New York trading firm Phibro, an arm of Travelers Group, the financial services giant in which Mr Buffett also has a large position. As it transpired, Phibro was dealing on Mr Buffett's behalf.

Comparisons with the extraordinary exploits of Nelson Bunker Hunt and his brother William Herbert Hunt in the late 1970s are grossly misleading, however. Together the Hunts set out to manipulate the market deliberately, buying more than one billion ounces of silver on the New York Comex market - the equivalent of two years' demand - and stashing it in a warehouse in Wilmington.

The tactic worked, driving the price up to from $7 to $50, until Comex stepped in to place limits on the amount that could be delivered in any month. The bubble burst, the price collapsed and the Hunts were banned from trading on US commodity exchanges after selling off all their racehorses to pay a $10 fine.

Berkshire Hathaway's exposure is tiny by comparison, amounting to less than 2 per cent of its investment portfolio. Which may be just as well since the silver market can be notoriously volatile. Production costs are negligible, since 75 per cent of mined silver is the by-product in the mining of other metals, such as gold. With the gold price at an 18- year low, a surge in supply looks unlikely.

But demand is not that buoyant either. The Indians, who account for 15 per cent of world consumption, have left the market almost entirely and may be about to start selling what silver they have for gold now that the wedding season is on the horizon. Mr Buffett is not known for picking losers. But those who are tempted to follow his example should bear in mind that the laws of price elasticity suggest silver is near its peak and that when the correction comes, it is likely to be violent.

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