Why silver excites! ►

14th January 2007

During the Christmas recess, an opportunity existed to read Vanessa Collingridge's splendid one volume biography of Queen Boudica (Ebury Press). It was Boudica who led the Iceni tribe (based in modern day East Anglia) and others against the Roman occupation of Britain in AD 60.

Boudica delivered a series of stunning achievements, destroying Camulodunum (modern day Colchester), Londinium (modern day London) and Verulamium (modern day St. Albans). For good measure her forces also managed to ambush and slaughter almost an entire Roman legion! Ultimately though, intoxicate in the 'bull market' of her achievements - and when confidence was absolute - she made the fatal error of meeting the apoplectic Romans in pitched battle and on their terms.

Undoubtedly, Boudica was as exciting as she was dangerous to follow! Formerly complicit with the Romans, during the reign of her husband King Prasutagus, she was flogged and her daughters gang-raped by the occupying forces once the King had died. Apparently, the old boy had been audacious enough to want to leave half his kingdom to Boudica and the girls - but had failed to understand that everything actually belonged to the state (Imperial Rome)! He had only been allowed to keep some of his property by their good grace and with him gone they moved in to collect 'death duties'. This leads us to an aside - isn't it strange how politicians generally seem so breathtakingly ignorant of the lessons of history! Yet, when it comes to helping themselves to other peoples income and property through taxation, the lessons bequeathed by the 'parasite state' that ancient Rome became seem to have been studied with uncanny enthusiasm! Indeed, the tax and spend ethos of that ancient civillisation even extends to New Zealand! No doubt emperor Nero, that splendid chap who was running Rome at the time of Boudica's revolt, would have been delighted to think that his philosophy of confiscation would ultimately spread to nations that had not, at that time, even been discovered!

Yet apologies for our digression. Above, we suggest that "Boudica was as exciting as she was dangerous to follow" and we believe a similar observation can be made about silver. At NZ Gold we believe this precious metal has the potential to deliver astonishing returns. Moreover, since we have made a philosophical decision to minimise [where possible] direct exposure to that current 'darling of the markets' uranium, we regard it as having the most explosive upside of the investments with which we feel comfortable.

At NZ Gold our research suggests that their are two potential reasons why the price of silver should, in theory, move much higher. The first relates to the simple issue of supply versus demand and the second to the possibility that this historic form of 'money' will again find a similar role, assuming history ultimately delivers its sombre verdict on the 'fiat currency madness' - with which politicians are currently fooling the masses!

In terms of the supply demand dynamic it is important to note that silver is employed in three main areas. Most of us are familiar with its use in jewellery, general silverware (such as your granny's teapot) and, of course, coins. Secondly, silver has played - and continues to play - a major if declining role in the photographic and x-ray area. Finally, silver is extensively used in all manner of industrial applications and new uses, such as its inclusion in medical devices and even clothing (because of its anti-bacterial properties) are steadily emerging. When considering this demand for silver it is important to recognise that an 'emerging dynamic' is always at work. Thus, whereas your granny (depending on how old you are) might have expected her teapot, and probably her cutlery, to be silver - or at least silver plate - today substitute materials are generally used. Although at NZ Gold we recently demonstrated our distinctly contrarian credentials by purchasing a silver teapot from a second hand shop - in honour of the precious metal! We will advise site visitors whether our infusions taste any better once we have obtained some suitable 'loose leaf' tea. Substitution of silver in photography, courtesy of digital cameras and other technology, is another example of how the 'emerging dynamic' operates and we understand there was a 22% cumulative decline in silver demand from photographic interests from 1999 - 2005. However, it is worth bearing in mind that falling demand for silver from conventional photography is associated with a corresponding decline in silver 'scrap-recovery'. Whether digital technology will ultimately eliminate conventional photography and image printing we wonder - given debate over durability issues.

It is also worth being aware that, if the silver price does rise significantly in the future, some 'substitution' might occur in the fastest growing area of silver usage - industrial applications. Conversely, because the cost of the precious metal used in manufacturing often represents just a small fraction of finished product value, a rising silver price may not be noticeably 'demand destructive'. Because silver was so cheap for so long it will be interesting to see just how this situation plays out now that the metal has sat for some time above US$10.00.

At NZ Gold it seems to us that the story of silver ties in with that old saying 'you don't know how valuable something is until it is gone'. That observation might also apply to other things that interest us - such as the 'sell-off' of New Zealand's coastal land to overseas buyers for what, to them, is a pittance. Or the casual acceptance of the death of Britain's hallowed democracy and liberties in exchange for the new 'peoples opium' of easy money and rising house prices (Imperial Rome's 'bread and circuses'). Like New Zealand's coastline, and Britain's freedoms, silver was once abundant with vast accumulated inventories being available. This has historically enabled more silver to be used than is mined during many years. Moreover, it is worth noting that most silver extraction arises as a 'by-product' of other mining activities. Thus, for more 'above ground silver' to be made available, conditions need to be conducive to commodities on a broader basis than just precious metals - and until recent years this has not been the case! We have seen projections that suggested 2006 would produce the first 'silver surplus' since 1989 but, we understand, this involves including investment silver as 'inventory' based on the fact that it will presumably be sold back into the market at some stage - if the price is right! Additional production also appears to be scheduled for 2007, which will add inventory. However, as with a lot of natural resources, some of the new anticipated supply will be from countries where significant political risk exists. That, of course, is a potential problem for investors and should the silver price advance substantially it might prove awfully tempting to 'dictators various' to simply help themselves! At NZ Gold we are rather parochial and like to confine our interests to New Zealand and Australia - countries that thus far appear to offer high standards of sovereign risk. Don't forget though, that even that doyen of constitutional piety - The United States of America - confiscated privately held gold in the 1930s. Our reading of history suggests that 'democratic' politicians behave themselves - in relative terms - during periods of prosperity but can behave quite disgracefully when national hardship strikes. Always be mindful, the sort of financial crisis that would explode the price of precious metals as a 'flight to safety' would be just the circumstances in which the state might resort to 'legalised theft'.

One of the difficulties, when considering the precious metals, is that you are assaulted by a great deal of information. Thus, it can be challenging to develop a concise position - and like those who followed Queen Boudica you never quite know what is coming next! However, at NZ Gold, we feel reasonably persuaded that the argument for favourable supply/demand dynamics in Silver has merit. We note figures indicating that the United States held some 2 billion ounces of silver in the 1950s - with worldwide government inventories now being down to around 90 million ounces. Apparently, most of this is currently held by the Indian government. Some silver enthusiasts even suggest that actual available 'above ground' silver may now be rarer than gold!

It is also worth reflecting that investment demand for silver is growing. Like gold, silver tends to increase in price during periods of massive money supply expansion. We can debate whether the price is really going up - or if the price of the fiat currency against which we judge the precious metals is simply 'going down'. What matters is that gold and silver have the potential to both protect purchasing power in their physical forms and to offer significant - if potentially risky 'leverage' - via mining shares and various other investment vehicles. Where silver excites so dramatically is the prospect that an already tight supply situation, for established users, could combine with a tsunami of money looking for a new home - if a major monetary disturbance follows the current dash in countries like the U.S.A., Britain, Australia and New Zealand to pull the same 'easy money confidence trick' that delivered such financial carnage to Weimar Germany. The commencement last year of a Silver ETF (exchange traded fund) and the ability to purchase allocated silver via an online account confirm the emergence of more ways to invest in 'the physical' metal than have been available in the past. At NZ Gold we hope to complete our guide to precious metal investment in the near future and will cover the advantages, and disadvantages, of the various investing options with which we are currently familiar.

How high can silver go? $US20 per ounce - $US100 per ounce? We don't know! Nor do we know what the United States dollar will be worth against the Kiwi tomorrow, let alone in a year, or two, or three. All we can say, from our own perspective, is that we are sufficiently persuaded by the case for silver that we are willing to invest a certain amount of money - without betting our shirt!

As much as it is great to be where the action is - and we hope their will be much upside action to the silver price - it is equally important to know when to 'slip out the door' and leave. Indeed, our thoughts return to Boudica. The warrior queen, and her supporters, had enjoyed a staggering 'bull run' of achievements at Camulodunum, Londinium, and Verulamium. Yet spectacular success can breed dangerous complacency and lack of judgement. This was to be Boudica's undoing, when that fateful decision was made to confront the Romans in pitched battle on their terms. How much better would it have been, for the individual Iceni or Trinovante warrior and his family, to have calculated the odds and headed off with his plunder and booty into the sunset. Likewise, at what time will the silver investor - if prices do explode - decide it is time to discreetly 'bow out' with his gains intact. Thus far silver has been honest! The metal has risen in price, but also fallen back sharply and then risen again. In doing so it has reminded investors that silver, like the Sirens of Greek mythology, can consume you if you 'sail to close'. At the time of writing we see it quoted at $US12.81 per ounce - some way below the high reached last year. To study the silver price, as we have done at NZ Gold for some time, is to be reminded that this is 'the restless metal'. We believe it is vital to keep this in mind - even if silver were to enjoy an exponential upswing at some stage. Like Boudica, silver can bring you great excitement and reward, but also great danger! If the price does move dramatically, and all around us we see unwavering confidence and commentators in the newspapers and on television telling us to "buy, buy, buy", we shall return our thoughts to the warrior queen and those lessons from the past - and at that point we shall sell.

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