Three Wise Kings: When Buffett, Gates and Soros All Bet on Silver

Three of the richest men on Earth all decided to put money into silver during the 1990s. Same metal. Same decade. Completely different strategies. And wildly different outcomes. Chapter 16 of Torsten Dennin’s “From Tulips to Bitcoins” tells this story, and it reads almost like a parable about what separates a good investment from a disaster.

The Three Investors

Let me introduce the cast. You probably know all three, but the details of their silver bets are far less famous.

George Soros was born in Hungary in 1930. He built the Quantum Fund together with Jim Rogers and became legendary for betting against the British pound in 1992. By the time he looked at silver, his net worth was around 14 billion dollars. At the end of 1994, Soros invested in a company called Apex Silver Mines. He and his brother Paul eventually held more than 20% of the company. Apex owned 65% of the San Cristobal mine in Bolivia, which held an estimated 450 million ounces of silver. That is a massive deposit. Soros was betting on the mine, not the metal directly.

Warren Buffett was born in 1930 too. The Oracle of Omaha, third richest man in the world, net worth around 47 billion dollars. CEO of Berkshire Hathaway. In 1997 and 1998, Berkshire quietly bought 130 million troy ounces of physical silver. That is about 4,000 metric tons. To put that number in context, it was roughly 20% of the entire world’s annual silver production. Just sitting in a warehouse somewhere with Berkshire’s name on it. Though to be fair, it represented only about 2% of Berkshire’s capital. Buffett’s reasoning was straightforward. He saw a gap between supply and demand. Inventories were declining. The math said silver was undervalued. So he bought the actual metal.

Bill Gates was born in 1955. Microsoft founder, richest man in the world at the time with about 53 billion dollars. In September 1999, through his investment vehicle Cascade Investment LLC, Gates bought more than 3 million shares of Pan American Silver at around $5.25 each. That gave him about 10% of the company. Pan American had silver mining projects spread across Mexico, Peru, Bolivia, and Argentina.

So there you have it. Three billionaires, three different approaches to the same commodity. Soros bet on a single mine in Bolivia. Buffett bought the physical metal. Gates bought shares in a diversified mining company. Same thesis, different vehicles.

The Scoreboard

Fast forward to the end of 2008. Time to check the results.

Buffett’s physical silver performed the best. No surprise there. Silver prices went up, and when you own the actual metal, you capture that gain directly. No management problems. No political risk. No hedging gone wrong. Just metal in a vault getting more valuable.

Gates and Pan American Silver came in second. The company had operations in multiple countries, which spread the risk around. It did well. Not as well as owning the metal outright, but a solid result.

And Soros? Apex Silver was a catastrophe. The stock crashed more than 90% from its IPO price. In January 2009, the company filed for bankruptcy. The man who broke the Bank of England got crushed by a silver mine in Bolivia.

Why Apex Silver Died

The Apex story is a case study in everything that can go wrong with a mining investment.

It started with politics. In May 2006, Bolivia’s president Evo Morales made loud threats about nationalizing the mining sector. He wanted the state to take control of natural resources. The stock dropped immediately, going from $26 to below $13 in the following weeks. That is a 50% haircut just from political noise.

Then the tax burden increased. Bolivia wanted a bigger cut of the revenue. This squeezed margins and made the economics of the mine worse.

Development costs exploded beyond projections. Building mines in remote parts of Bolivia turns out to be expensive and unpredictable. Apex had to sell part of its stake to Sumitomo, the Japanese conglomerate, just to keep the project alive.

And then came the killing blow. To secure credit lines, Apex had to sell silver futures as hedges. Basically, they promised to deliver silver at fixed prices in the future. When commodity prices rose sharply in 2007 and 2008, those hedges turned into massive losses. The very thing that was supposed to protect the company ended up destroying it. They were short silver in a rising silver market. The losses piled up until there was nothing left.

January 2009. Bankruptcy.

The Lesson

Dennin uses this chapter to make a point that is easy to forget when you are looking at a mining stock that seems cheap. Silver mining stocks have a leverage effect. When silver goes up, mining stocks can go up even more, because the mine’s costs are mostly fixed while revenue grows with the silver price. That leverage works beautifully on the way up.

But leverage works both ways. When things go wrong, and in mining things always go wrong eventually, the losses multiply too. Political risk, cost overruns, bad hedging decisions, government interference. Any one of these can wipe out a mining stock even while the underlying commodity is going up in price.

Buffett bought physical silver and made money. Simple, boring, effective. Gates bought a diversified miner and did okay. Soros bet on a single mine in a politically unstable country and lost almost everything.

The safest way to bet on silver, or really any commodity, is to own the commodity itself. The further you get from the actual metal, the more things can go wrong between your money and your return. Buffett understood this. He usually does.

Three of the smartest investors alive, same metal, same decade. And the one who kept it simplest won.

Previous: Chapter 15: Metallgesellschaft

Next: Chapter 17: Copper Mr Five Percent

This is part of my From Tulips to Bitcoins book retelling series.