Buffett's Silver Streak

Being a genius investor has its rewards besides making one filthy rich. Chief among them is knowing that hordes of people will follow your every move once you disclose what you have most recently bought. All the genius wannabes, you can be sure, will pile in and drive up the price of what you already own. Great work if you can find it.

So it was last week in the silver market, where prices spiked to a nine-year high after Warren Buffett, the Oracle of Omaha, disclosed that he had taken a major shine to the metal and bought up 129.7 million oz. of the stuff. That amounts to 37% of the world's aboveground stock of raw silver, according to the CPM group, a commodities and precious-metals consulting firm.

Buffett made his gleaming presence felt. The price for an ounce of silver to be delivered in March hit $7.28, up 16% in the two days after Buffett's disclosure and up nearly 70% since he started buying the precious metal six months ago. Despite the surge, veteran--and thus oft-pummeled--silver traders will note that a price just north of $7 is nothing next to silver's peak in 1980, when it hit $50 amid an infamous attempt by the brothers Herbert and Nelson Hunt to corner the market.

Still, the jump in price spread chaos across the market as Buffett called for delivery of more than 42 million oz. of the silver he had bought--after already having some 87 million oz. in tow. Panicky short sellers, who had borrowed silver and sold it in the expectation that the price would fall, had to swallow huge losses to complete the deals. Major buyers of silver like Eastman Kodak, which processes millions of ounces a year into film, faced big increases in raw-material costs. And everywhere families began eyeing grandma's precious flatware as a possible source of cash. "We think we may see the spike reach double digits--maybe $10 an ounce--but one doesn't really know in this rarefied territory," says Nick Moore, director of Flemings Global Mining Group in London.

Buffett's purchases shifted vast amounts of silver from U.S. warehouses, where stocks of the metal were publicly listed, to warehouses in London that are not required to disclose how much they hold. That helped to keep the purchases under wraps. The disappearance caused a Canadian investor to sue the giant commodities-trading firm Phibro for deliberately hiding supplies of silver to push prices up. Phibro, a unit of the Travelers Group--whose shareholders include Buffett's Berkshire Hathaway holding company--denied the charge.

Buffett's silver spree caught almost everyone off guard. After all, the man made his personal billions--$25 billion at last count--by buying and holding undervalued stocks. But silver doesn't even pay a dividend and, worse, costs money to store. So why on earth did Buffett use Berkshire to acquire 4,000 tons of silver--a cache weighing more than 10 Boeing 747s--at a cost of $650 million between July 25 and Jan. 12? Until then, Buffett hadn't owned an ounce in 30 years.