EDITOR'S NOTE: Buffet's purchase of silver in 1997 was based upon gut feeling, intrinsic value and growing industrial use. In the wake of the pandemic, those factors still exist--only more so.
Warren Buffett made an unusual move in 1997 when he bought 111 million ounces, or nearly 3,500 tons, of silver. The famed investor's purchase helped make Thomas Kaplan a billionaire.
"That changed everything"
Kaplan was in his early 30s, with a doctorate in history from Oxford University but zero industry experience, when he founded a mining company named Apex Silver Mines in 1993. Despite his lack of credentials, he received a $10 million investment from billionaire investor George Soros in 1994.
At the time, the global silver market was still recovering from oil tycoon Nelson Bunker Hunt and his brothers almost cornering it in 1979. The silver bubble had burst in early 1980, slashing the price of the precious metal from $50 an ounce to less than $10, and making it a toxic asset for many investors.
"What really put an end to it was when Warren Buffett bought [those] ounces of silver," Kaplan, now the chairman of NovaGold Resources, said during the miner's virtual shareholder meeting this month, according to a transcript on Sentieo, a financial-research site.
"I remember it vividly because there but for the grace of God, it became public that he had done this the week when I was taking my silver company public," Kaplan continued, referring to Apex.
"And otherwise, not a very good time to be in the market, but that changed everything."
Buffett and his partner Charlie Munger's silver investment didn't just benefit Kaplan. It also generated a pre-tax return of more than $97 million for their Berkshire Hathaway conglomerate, Buffett said in his 1997 letter to shareholders.
The Berkshire CEO described the wager as a "return to the past" as he bought silver in the 1960s in anticipation of its demonetization by the US government. In 1997, he bet on the metal again as he predicted shrinking stockpiles would push up the silver price.
"In recent years, bullion inventories have fallen materially, and Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand," Buffett said in the letter.
Bill Gates, the Microsoft cofounder and Buffett's close friend, must have come to the same conclusion. He took a stake in a miner, Pan American Silver, in 1999.
"Gold on steroids"
Buffett's vote of confidence restored the perception of silver as a viable investment.
"From that moment on, I never had to explain to people the rationale for owning silver," Kaplan said on the NovaGold call, referring to the metal having many industrial uses and serving as a store of value.
"The fact that it has both components means that it's gold on steroids," he added.
Buffett's endorsement of silver enabled Apex to list its shares successfully, paving the way for Kaplan to cash out most of his stock by 2004. He went on to score huge returns from investing in an African platinum miner and founding a Texas oil-and-gas company, both of which ballooned in value and were acquired in 2007.
Today, Kaplan leads The Electrum Group, an investment firm focused on natural resources. He also heads up Panthera, an organization devoted to "big cat" conservation, and boasts the world's largest private collection of Rembrandts.
The billionaire credits some of his success to Buffett's surprise bet on silver in 1997.
"I owe him one," Kaplan told Business Insider, adding that Buffett's purchase was "one of a string of just ridiculous strokes of luck."
Silver could surge again
Precious metals are poised for another historic rally as investors seek to safeguard their wealth from the coronavirus pandemic, Kaplan predicted on the NovaGold call.
"Buffett took his position at $4 or $4.50, and silver ultimately went back to $50," he said. "You're going to see something not dissimilar once again, in silver, but very much in gold."
The Berkshire chief's dearth of stock purchases when the market tanked in March suggests he's worried, Kaplan argued, strengthening the case for investing in gold and silver.