Recent Action In Silver ::: NZ Gold

Recent action in silver

Sunday May 11th 2008

When the curtain goes up at the 'silver theatre' we could be in for a spectacular performance: (but those wanting good seats will face challenging terrain getting there!)

Once, when Britain's educational system at least tried to equip young people with skills for their future (instead of preparing them for a life of voting for the re-distributive left in exchange for welfare benefits) no self-respecting schoolchild would have been unaware of the fate of Thomas Becket. As Archbishop of Canterbury, under England's King Henry II, Becket managed to enrage his monarch so severely that Henry was said to have cried "will no one rid me of this turbulent priest". As usual with these things 'sycophants various' were lurking in the vicinity and four of them, led by Reginald fitz Urse, took the king at his word and proceeded to Canterbury - where they savagely murdered the unfortunate clergyman.

At NZ Gold we suspect there will have been some investors lately who may have felt driven to offer a similar sentiment "will no one rid me of this turbulent investment" when considering their interests in silver. Like Becket, silver has been showing fierce independence - having 'tantilised' enthusiasts for the metal with a run-up to over US$21 per ounce before slumping back dramatically. So what thoughts can we offer our readers?

We suspect the first 'port of call' is to revisit our article from 14th January 2007 "Why Silver Excites". In that update we noted a silver price of US$12.81 per ounce. At close on Friday 9th May 2008 silver was being quoted at US16.79 per ounce - a differential of US$3.98. This represents a premium to the January 2007 figure of just over 31% or an 'annualised' gain of approximately 25% - interesting when we consider that the white metal has recently taken such a savaging! When the current price is considered against that at the commencement of the 'silver bull' (around US$5 per ounce) we start to comprehend some of the wealth producing potential of the restless metal. Moreover, whilst physical silver investors have been seeing a major - if highly volatile - overall advance in the value of their ounces over the last few years many other Kiwis have been learning a brutal lesson about 'counterparty risk'. One of the tragedies of New Zealand's grotesquely mismanaged economy is that people have been persuaded into investments with high levels of counterparty risk - in order to try and mitigate the relentless process of monetary debasement over which our cynical leaders preside. More tragic still is that many of those investors are superannuatants on fixed incomes, or home owners of modest means, who have been persuaded to mortgage the equity in the family home. Quite reasonably, they believed their debentures or 'off the plan' property purchases were 'as safe as houses'.

Always remember, when held in physical form an ounce of silver is an ounce of silver - irrespective of the 'price' in fiat currency on a particular day. The same cannot be said of any form of 'paper investments' - they have value only if the 'counterparties' with whom the funds have been domiciled are able to meet their obligations. This is a costly lesson that many conservative Kiwis, who deposited their money with finance companies - in return for higher interest rates - are being forced to learn!

When considering 'recent action in silver' we also believe that New Zealand's growing 'sovereign risk' should be considered. As regular visitors to NZ Gold will be aware, we are increasingly persuaded that this country is inexorably advancing along Friedrich von Hayek's 'Road to Serfdom'. In our view three recent phenomena lend additional weight to our hypothesis. These are: 1] The prostituting of New Zealand before the offensively authoritarian regime in China. 2] The simultaneous snubbing of Canadian interests over their legitimately sought after stake in Auckland International Airport. 3] The 'defacto' acknowledgement by the National Party that fighting a general election - on the principles of true liberalism and economic laissez faire - is a recipe for permanent opposition. At NZ Gold we fear that 'the mob' - to whom we alluded in our March 16th update "Are your assets at risk from the mob-ocracy" is developing an impregnable demographic hegemony. Within this we suspect that those narrow but immensely powerful interests - whom we believe are planning a fascist future for New Zealand - will be delighted! The 'mob-ocracy' gets its dose of petty nationalism over the airport issue whilst being too gullible to understand that, under Ms Clarke's auspices, their country has pawned its sovereignty to international banks and now China. Within this the reported comments of the Prime Minister at the Labour Party's recent (April 2008) election year congress in Wellington leave us incredulous:

"We have a vision for the future of New Zealand which sees New Zealanders in control of their destiny - and not as a small pawn in the plans of others".

How much has this country of some four million people run up in foreign liabilities - NZ$279 billion? (source: interest.co.nz) How much have young Kiwis so far accumulated in student loans - NZ$10 billion? Having 'mortgaged' the nation to foreigners (largely to finance the great 'house price con') would the Prime Minister seriously have us believe she has now discovered nationalism? We would especially urge Labour's traditional supporters - the soon to be 'immeserated' working class to comprehend. It is the horrific magnitude of our external debts, and the 'exiling' of our most talented young people, that that will ultimately rob New Zealanders of control over their destiny - not the sale of a minority stake in an airport.

Within considerations of sovereign risk two factors should enter the New Zealand silver investors consciousness. The first is to confront the fact that, as well as negotiating the turbulence associated with worldwide financial markets, shareholders in Kiwi listed corporations must now consider the fact that their interests may be prejudiced by government fiat. Looking forward we simply ask - could this progress from expedient government interference to outright confiscation? Thus corporate 'counterparty risk' now meets increasing government instigated 'sovereign risk' and suddenly a little of silver's volatility and danger seems diminished in relative terms! Then, of course, there are the risks associated with investing in a country with 'banana republic' levels of external debt. At some stage logic - and history - suggests the Kiwi dollar is going to confirm that 'flightless birds' inhabit the ground - not the sky. Now we know the epitaph for the New Zealand Dollar has been written many times - and still the currency remains aloft (albeit with a recently descending bias). Looking forward we wonder if people won't be wishing they had 'got a little money out' when the exchange rate was reasonably favourable. Again, such considerations raise the relative attractiveness of silver - especially since its recent episode of price weakness.

When reviewing 'recent action in silver' investors also need to reflect on supply issues. One key factor, that gives many 'silver bugs' great hope for dramatic price increases in the future is the belief that vast quantities of the metal have effectively been 'short sold'. Put simply it is hypothesised that a huge dichotomy exists between 'paper title' to silver and the amount of physical metal available for delivery. The theory goes that, at some stage, the 'shorts' will have to make good on their paper promises and this will result in an explosion in the price of physical silver. Frankly, at NZ Gold, it is beyond our experience to really know. However some commentators, particularly the highly respected Theodore Butler, do offer compelling analysis as to why there is more to the silver market than a simple process of 'willing buyer and willing seller'. Mr Butler offers visitors to his website an opportunity to read his many commentaries which are archived in chronological order. At NZ Gold we greatly enjoying reading his material. A hyperlink is provided at the end of this update.

Certainly, as we ponder silver supply, it has been thought provoking to read reports of physical silver shortages affecting investors, as they sought to take advantage of the 'acute phase' of the recent price plunge. In most markets falling prices - at the same time as a shortage - would be deemed very unusual, although a variety of factors such as dealers holding back for a better price or being overwhelmed by unanticipated demand could be responsible. All we can suggest is that such reports are a reminder - that opportunities to invest in a particular asset class don't always remain available or affordable! Rather like fine period properties, that were abundant in Britain's East Anglia for derisory prices at the start of the 1980s, but that now command outrageous sums, silver has the potential to deliver the investors lament - 'if only'! So debate over supply is beginning and silver prices have advanced dramatically since the precious metals bull began. Yet silver remains affordable and available in New Zealand. At the time of writing ten beautiful one ounce 'Silver Fern' coins can be purchased from the New Zealand Mint for around $270 (excluding courier delivery & insurance). For those interested in other one ounce silver options we understand that these can be purchased from NZ Silver. As with the NZ Mint, we have provided a hyperlink to their website at the end of this article. Yes, you will pay a premium of approximately 16% plus over the corresponding 'spot silver price' for physical silver purchases in New Zealand. Yet, in the great scheme of things, we are not sure that this is hugely important. This is especially the case if you are prepared to give thought to our 3rd February update "Lose pounds and gain ounces" where we point out how simple changes to wasteful spending can yield funds with which precious metal ounces can gradually be purchased and the costs 'averaged'. By thus employing money that would otherwise be lost on 'consumptive trivia' risk can effectively be mitigated. After all the value of that daily cappuccino is nil once it has been drunk - yet divert those funds to an ounce of silver per week and who knows!

We conclude by offering visitors to NZ Gold a six point checklist. Hopefully, this will help our readers to reach a decision, or at least to provoke thought, about the merits of silver both as an investment and as 'financial insurance'. Since the recent 'savaging' of the precious metals silver has struggled to make any meaningful headway, but this does mean that ounces can currently be purchased at a substantial discount to earlier highs. Yet, however persuaded readers might be about the case for the white metal, events since late March should serve as an important reminder - silver excites but it also bites!

1. Am I adequately convinced that buying silver will preserve and enhance the buying power of my money?

2. Am I willing to accept the very high levels of price volatility that accompany investments in silver?

3. Am I willing to accept the 16% plus price premium over 'spot rates' to buy physical silver in N.Z?

4. Am I able to buy my silver with funds that I will not need to liquidate in the short to medium term?

5. Am I willing to accept the inconvenience/costs associated with storing physical silver?

6. Am I willing to accept that, in extremis, a bankrupt government could seek to confiscate silver?

For our readers convenience and interest the following links are provided►

Theodore Butler: www.butlerresearch.com NZ Mint: www.nzmint.com NZ Silver: www.nzsilver.com

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