The Silver Rocket has Lift Off

Weekly Wanderings 4 November 2010

In this week’s wanderings we concentrate on the silver market, which has shown rapid rises of late.

The Silver Rocket has Lift-Off

During the last three months, the price of silver in New Zealand Dollars has jumped by one third – from around 24 NZD per oz to around 32 NZD per oz. This can be compared to the much smaller percentage rise (around 11%) in the NZD price of gold over the same time period, from 1600 NZD per oz to 1770 NZD per oz (See the charts below for a graphical representation of gold and silver in NZD).

silver_nzd-chart_july_to_november 2010

gold_nzd-chart_July_to_november_2010

Of course both of these rises have to be seen in the light of a decline in the USD index from around 82 down to around 77 – that is, around 6% and also in respect of the strength in the NZ dollar – currently at around 77 US cents, having risen from 73 cents at the beginning of August.  (You might recall we drew your attention a bit more closely to silver just prior to the current run up, in June and July of this year with these couple of silver videos we put together.)

We have been following the silver story for a long time – including the work of two longtime students of drivers of the silver market – Ted Butler and David Morgan.  Other notable commentators on the topic of silver investment include Eric King who bought 3 tonnes of the stuff when it was less than 4 USD per oz and several of the guests interviewed regularly on his site, such as Eric Sprott of Sprott Asset Management. Sprott has long been a staunch proponent of the idea of including bullion as a substantial base of an investment portfolio.

Inflation Reflected in the Price of Commodities

The price of commodities generally has been rising of late – for example sugar has just reached a 30 year high. Silver is uniquely both a commodity and a currency. It has a number of industrial uses, particularly in electronics, but it has a long historical role as a currency and is beginning to be viewed in this way again. Also, above-ground silver is much scarcer in relation to above-ground gold than the gold/silver ratio would suggest.

Big Investment Demand for Silver Coins

This year has seen rapid growth in the demand for coins such as US silver eagles and Canadian silver maple leaf coins – just to mention two of the coins available to silver investors.  Locally here in NZ, we are hearing annecdotal reports of a pick up in silver bullion buying too.  These reports are somewhat evidenced by the fact that some silver bullion products from various suppliers are not available for immediate pick up but have a few days wait presently.

Too late for Bullion Purchases?

We still advocate building a base position of silver bullion, by dollar cost averaging. Even though the price of silver has risen fairly rapidly over the last three months, as we have indicated above, it can rise much further than the current levels. There are a number of investors who sold out their silver positions as silver reached the 20USD/oz level who have been waiting for a correction since then to re-buy their silver, which has not so far materialized.  Even with the silver price at current levels, buying pressure continues to be strong, which means that we could easily be moving into a new trading range. One can never be certain of these things, and that is why dollar cost averaging is a sound policy.

Silver Mining Company Valuations?

The leading silver mining stocks are now undervalued relative to the price of silver. Company stock prices have yet to reflect the increase in the price of silver. We note that a 30% and more increase in the silver price flows directly to these companies’ bottom line.

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