Perhaps the most illustrious investor of all time, Warren Buffett, made a news splash again by making the largest acquisition of his career. His company, Berkshire Hathaway, is buying Burlington Northern Santa Fe, one of four remaining transcontinental railroad companies, for $100 a share, paying a hefty 31 percent premium over Burlington’s previous closing price. There’s also another, smaller, acquisition in the works: Toolmaker Stanley Works will acquire rival Black & Decker at a smaller 22 percent premium. The combined company will be worth about $8 billion. The merger is expected to generate $350 million in savings within three years. Both deals show that the M&A market isn’t dead.

The M&A activity, while providing bullish support for the market, hasn’t been enough to keep the broad indices firmly in the green. Today, for example, the market opened lower in early trading and only managed to push marginally higher later in the day, mostly helped by commodity shares. After the rally over the last 8 months, stocks are well out of the bargain territory, and investors are beginning to fret about the many uncertainties surrounding economic recovery.

Today’s market is more fragile than most people care to admit. As CNN put it, “Unemployment continues to rise and about 30% of factory capacity remains idle. Credit for businesses is still tight and consumer confidence is falling.” Worse, positive earnings last quarter were largely the result of one-time measures like cost-cutting and government handouts. As these dry up, the market could easily experience a correction as large as last year’s.
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Unemployment, low consumer sentiment, flat personal income, and the higher saving rates all point to an increasingly difficult environment. (On the topic of unemployment, Johnson & Johnson, one of the largest companies in the world, just announced that it will slash up to 7,000 of its worldwide workforce. Although the company promised most of the cuts will be outside the U.S., it’s yet another indication of overall economic weakness.) Consumer spending is about 70 percent of GDP so healthy spending growth is a must for sustainable recovery. With government stimulus programs like Cash-for-Clunkers and the tax credit for first time homebuyers either ended or being phased out, it is more likely than not that Americans will be spending less. If September’s one-half percentage drop in consumer spending is any indication (the first month after Cash-for-Clunkers ended), we won’t be spending more than we can afford anymore.

Tomorrow, the Federal Open Market Committee, the policy-setting arm of the Federal Reserve, will announce its decision on whether the benchmark interest rates will be raised from their current, record-low levels. Although there were some rumblings of rate hikes, there will unlikely be any change until the unemployment situation improves significantly, as the St. Louis Fed President James Bullard remarked a few weeks ago. Despite some signs of improvement in the economy, including the recently achieved 3.5 percent (annualized) GDP growth in the third quarter, the economy is far from being out of the woods. Most, if not all, of the growth can be attributed to government incentives, and in the absence of the stimulus we could see another turn into the red. As a result, any interest rate hikes at this time would be unlikely as the Fed would essentially be playing with fire.

One reason I’m pretty sure the real bull market in gold is only just warming up (despite the recent high of over $1,120 an ounce) is that gold bulls are generally led by gold’s volatile junior—silver.

Since 2000, while gold prices have more than quadrupled, silver has not (tripled, yes, but not yet quadrupled). However, signs are emerging that suggest the real bull market in precious metals may finally be getting underway.

So far in 2009, gold has risen 27% (from $874.50 in January to $1,115.25 in the past week). But silver prices have increased 59% (from $11.08 in January to $17.63).

If we are entering a true bull market in precious metals, you’ll want to own a little silver as well as gold, and not just because of its tendency to race ahead of its yellow cousin.

Silver, unlike gold, has a number of industrial uses—particularly in the alternative energy field. If the world economy is to grow, so will energy demand. We will be forced to accelerate our roll out of alternatives to oil, and that will lead to sharply higher consumption of silver.

Currently, the world produces 21 million tons of silver annually. About half of that is currently used for industrial purposes. However, in a few short years that could rise to 100%.

You see, in addition to photography and jewelry, silver is used for making batteries, solar panels and wind turbines.

Consider that Apple is already making laptops with silver-zinc batteries, and that silver batteries will soon make their way into cell phones as well. Multiply the 8 grams of silver needed to make a small battery by the millions of laptops and cellphones produced each year, and you get an increased demand of roughly 8,000 tons a year.

If the world gets serious about developing solar energy, we will also need millions of solar panels spread across the planet—which will put incredible pressure on silver supplies.

China, for instance, already uses about 4,500 tons of silver a year, and its consumption is growing by 10% a year. At this pace, within 10 years, China alone will be using more than half the world’s annual silver output.

And that’s just the industrial demand. As silver becomes more expensive, people will increasingly buy silver for investment purposes—which will raise demand and prices even faster.