In 2023 at a Berkshire Hathaway shareholder conference, someone asked Warren Buffett how he could know when silver, an asset that pays no yield, is a worthy investment.
His reply had nothing to do with technical analysis, inflation, or any complex formulas. Instead, it came down to arithmetic.
Buffett estimated that the world was consuming perhaps 150 million more ounces of silver a year then it produced, a trend that had persisted for a few years. For most commodities, that imbalance would have caused prices to soar. But for silver, one simple anomaly -- a massive above-ground inventory -- was being used to cover the production shortfall.
Image source: Getty Images.
Buffett said that this couldn't last. He predicted that a new equilibrium would be established, either in the demand for silver, the supply of it, or its price. Because industrial demand would remain robust, and because silver production is inelastic to demand, Buffett effectively ruled out the first two. "We don't think that the price change would necessarily be minor."
That was putting it mildly. In the three years since, silver prices have rallied by approximately 150%. You can see silver's rally reflected through the iShares Silver Trust (SLV 1.10%), a fund that buys and stores physical silver.
NYSEMKT: SLV
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The rest of Buffett's prediction came true as well. Supply was inelastic as he anticipated, with mine production rising by less than 1% in 2024. Meanwhile, demand continued to outstrip supply, with the world consuming 149 million more ounces of silver than was produced last year.
Buffett's silver prediction, which may have seemed outlandish after years of falling prices, has come true. The new equilibrium is here, and it's come in the form of a roaring bull market for silver.
My favorite way to play the silver boom
The aforementioned iShares Silver Trust is a simple way to gain exposure to any silver rally. The fund, which seeks to generally reflect the performance of silver prices, has approximately matched silver's rise over the last decade, though there has been some slight average annual underperformance over the last decade. Still, the fund is convenient for investors who want to avoid the hassle of buying bullion and then storing it.
In my opinion, a more effective way to capitalize on silver's rise is through First Majestic (AG 3.23%).
First Majestic is unique among miners because it's an exception to the rule around silver that Buffett observed. Silver is mainly a byproduct metal, so it's normally produced on the side by miners who are focused on gold, lead, zinc, or copper.
NYSE: AG
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But this Vancouver-based, $7.8 billion company is close to a pure-play silver miner, with 57% of its revenue coming from silver. That's higher than any of its peers, and the company just delivered a record quarter with 3.9 million ounces produced, a 96% rise year over year.
The firm has all-in sustaining costs of between $14.80 to $15.80 per ounce for silver, meaning that its silver mining operations are profitable as long as silver prices remain above that range.
Of the company's $139 million revenue surge in Q3, $73 million came from increased silver production, while the remaining $66 million came from rising silver prices. This is extremely bullish for the company because it means that First Majestic's earnings are not at the mercy of whims in the silver market. The company is taking aggressive steps to ramp up its production of a critical commodity that is, with rare exceptions, inelastic on the supply side, as Buffett said.
Potentially concerning is the company's price-to-earnings ratio of 113, which looks high. But this is a company that just grew year-over-year revenue by 96%. If ever there was a candidate to grow into a lofty valuation, First Majestic is it.
What if silver prices crash? That will happen one day, but I don't see it happening in 2026, or any year this decade. The forces supercharging the demand for silver, from the rise of solar panels and electric vehicles, to the age of artificial intelligence and the tens of millions of ounces that will be needed for semiconductors, aren't letting up. This year will mark the fifth consecutive year of silver demand outstripping supply, with a deficit of over 100 million ounces. This enduring trend makes First Majestic a compelling precious metals play.
