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Analyst sees silver's lining
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February 4, 1998: 12:29 p.m. ET
Years of low prices and mine closings have caused an industrial silver shortage
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NEW YORK (CNNfn) - Although the market outlook for gold has been affected by a number of factors in 1997 and into 1998, Jacques Luben, executive director of the Platinum Guild International, says that none of these factors will work against silver.
Here is a transcript of his conversation with CNNfn anchor Deborah Marchini on "Before Hours".
DEBORAH MARCHINI: I know you represent the metals industry to a certain extent. Tell me, if you can, what's going on with Warren Buffett taking up 20 percent of the world's silver.
JACQUES LUBEN: Well, it actually makes a lot of sense. If you look at the way that he would want to balance his portfolio, he's obviously made a lot of money in financial assets. And the fate of the stock market, in large part, depends on inflation being low. So, here you have a situation where you could buy silver at a relatively cheap price -- which he started doing last year -- and you've got the industrial component going forward because there has been a shortage of silver.
So, even without inflation; even without a weakening dollar, silver was poised to go higher. By acquiring silver at lower prices, he was able to benefit from the shortage. And of course, if inflation picks up and the dollar weakens, silver will go that much higher.
MARCHINI: He'll have a hedge against it. OK. The industrial uses and industrial shortage of silver explain in large part why silver has diverged from where gold has gone, which is basically down to nowhere. Silver has rallied sharply.
Or could other factors be at play? I'm wondering if somebody -- like the Hunt brothers back in the late '70s, early '80s - might be attempting to corner the market in silver. The Hunts, of course, went broke in the process.
Nobody's suggesting that's what Warren Buffett is trying to do, but one has to think that if you're purchasing one out of every five ounces of silver that are out there, you're going to have some impact on prices just by virtue of your actions. My question really is: How much of the rise we've seen in silver prices might be because somebody's out there buying in large quantity?
LUBEN: Well, I think that it's pretty clear that when Warren Buffett started to buy, that started catalyzing the move higher, and so you have a lot of commodity people who are trend followers and the higher the price goes, the more buying comes in.
But I think there's a huge difference between the Hunt situation and this situation, which is that it's pretty clear that the Hunts had to borrow a lot of money to buy the silver and hold onto it, and a lot of their positions were in the futures market. Here you have the most respected money manager in the world, who's got a lot of cash; who can buy the silver and then put it aside.
And I don't think he's trying to squeeze the silver market. I think he's just trying to diversify his portfolio and he can hold on to it for a long, long time. So, I think there is a huge difference in those two situations.
MARCHINI: Well, my question wasn't about market manipulation. It was really just about the way that markets worked. If somebody is out there buying up 20 percent of the market, could that alone push up prices?
LUBEN: Absolutely.
MARCHINI: What about the disclosure that a single individual has now purchased 20 percent of the market? He is known as one of the savviest investors there is.
LUBEN: Absolutely. I mean, it would probably have the same effect that it would have on US Airways (U) or Salomon Brothers (CXB) when it became clear that Buffett was building a position in those two companies.
MARCHINI: They just went right up.
LUBEN: That's right.
MARCHINI: We've got the price of silver up 58 cents right now. I remember silver moving in pennies and increments thereof. That's a huge move.
LUBEN: I also remember silver moving up in increments of dollars in the late '70s and the early '80s, although I don't expect that to continue.
That's obvious, if you have 20 percent of the world's silver going off the market and there is an industrial shortage. Remember, North American silver production has been virtually nonexistent for years because prices have been very low. Even some of the Latin American producers in Peru and Mexico have been under pressure with the low silver price, so it would take much higher silver prices to justify reopening some of these mines, and I think that the shortage will be there for a long, long time [271Kb WAV] [271Kb AIFF]. 
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