Charlie Munger was born exactly 100 years ago in Omaha, Nebraska. His family circumstances were middle class. The Mungers owned a store on the main street. The store offered provisions such as cigarettes and vegetables. The store was a vital cog in the town, but there was little sign of the riches that followed. Munger and his senior sidekick Warren Buffet built Berkshire Hathaway — the world’s most famous investment company.
Munger was not born with a silver spoon. This might explain his aversion to precious metals. He was a scathing critic of gold and silver. He said, “I think civilised people don’t buy gold, they invest in productive businesses.”
If Munger had a silver spoon as a toddler, it would have been worth 23 US cents an ounce. It is now worth US$24 ($31.89) an ounce, an annual return of 4.5%. This is less than half the return for investing in the Dow — 10.5%.
This does not mean that Munger was right to bet on the stock market versus precious metals. In the 1970s, investing in Silver would have outperformed the Dow by a factor of three times.
Silver has had a tough time since the 1970s. Today, the price of silver is 80% less in real terms than its peak in 1979 and is 50% less than its price in nominal terms.
There are now signs that the Fed would cut interest rates. Lower interest rates are positive for precious metals. It means that the opportunity cost of holding an asset that does not pay interest is lower. Hence, gold and silver are attractive if interest rates are about to fall.
The hopes of a rate cut have driven gold prices by 10% since October. It has outperformed its poor cousin, silver, by 3%. The Gold Silver Ratio (GSR) is 89 times above its 1980 to 2020 ratio of 65 times.
Holding gold as a hedge is a familiar story. The case for silver is even better. Gold has very few uses. It is used as an ornament and a store of wealth. Silver, by the sharpest of contrasts, can be used by industry and for health.
The digital appliances boom has provided a boost to silver. More than half of the world’s silver is for industrial use. These include electronics and solar appliances.
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Silver’s magic is that it is both light and conductible. It is the most conductible of the elements. It is ideal for the emerging wearable technology market like FitBits. Solar panels also need silver.
Many people have missed a basic aspect of silver supply. The supply of silver is much smaller than that of gold. The world’s gold supply consists of the capacity that has been mined. This can be found in homes, museums and people’s wrists. The world supply of gold is about 6 billion tonnes.
On the other hand, half of the 54 billion tonnes of silver that has been mined has been used or destroyed. Less than 10% of the remaining 24 billion tonnes can be invested. The rest is in jewellery, silverware and statues. This makes silver far scarcer than its better-known cousin.
Rate cuts followed the global financial crisis. Silver prices rose five-fold in the three years from May 2008. It is at the same price that it was in December 2010. We may be on the verge of a rate cut. This suggests that silver may surge.
There are ETFs that follow the silver. SLV ETF, which trades on the New York Stock Exchange is the most prominent. Investing in stocks that produce silver may provide even better returns than chasing the commodity. During the 2008-2011 silver bonanza, silver producers did much better than silver. The ones that outperformed included Great Panther Silver and First Majestic Silver.
There is an irony in Munger’s disdain for silver. Berkshire Hathaway had a massive silver position in 1998. Munger’s firm held 130 million ounces of silver. They wanted silver as a hedge during that disastrous year. Munger changed his mind later. He may have missed a trick by forsaking it.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era
