Since we negotiated a deal for our readers to buy good value gold bullion in New Zealand 4 months ago, we’ve had quite a number of questions on silver.
One of the main questions we’ve received is why is it so expensive to buy silver in NZ? With premiums (i.e. the mark up) above the spot price of silver of usually 20% and even as high as 30%, it’s a fair enough question to ask, given any research online will turn up much lower premiums in other countries, where they are at least somewhat closer to gold.
So, why is poor mans gold so expensive in New Zealand?
There are a couple of reasons. Firstly while silver is mined here in NZ most of it is shipped overseas to be refined into pure silver. Take the well known Newmont gold and silver mine in Waihi for instance. 20 kg Doré bullion bars (bars containing anywhere from 75-90% silver and 10-25% gold) are shipped to the Perth Mint in Western Australia to be further refined and separated into pure gold and silver bullion bars. These are then sent to the international market.
This means a great deal of the silver demand in NZ is supplied by purchasing in the international markets and shipping back to NZ. This is where the high cost comes in. Silver is only about half the density of gold so takes up a greater volume per equal weight.
So here’s where geography comes into play.
Our isolation from the rest of the world means silver has to be shipped quite a distance and because it is relatively bulky it makes for high shipping costs. And with high shipping costs also comes high insurance costs. A boatload of silver bullion is worth, well a boatload of silver! And the insurance companies charge a high sum to cover the potential for loss.
But even more importantly silver is not called the poor mans gold for nothing as the current price per ounce of silver is only about US$20.50 versus US$1260 for gold. While you can buy a large amount of silver for the price of one ounce of gold (61 ounces to be precise at the current prices), this also means that a comparable amount of silver purely in terms of dollars will both weigh a lot and take up a lot of space. So again freight and insurance is much, much more than for gold.
So this difference in volume and weight compared to value is a key factor in the higher premiums charged for silver making silver more expensive to buy compared to gold in New Zealand.
The precious metals markets in NZ are also pretty small compared to elsewhere in the world. There isn’t (unfortunately we reckon) the demand that there is in say India, the Middle East, China, or even the USA and Europe. So less demand often means less competition which will usually translate to higher prices compared to areas where the markets are more developed.
However even overseas silver still sells for a higher margin than gold.
So why is this?
The simplest explanation is that it is a reflection of the greater “work” that goes into fabricating silver in proportion to its value compared to gold. That is, the premium includes a fabrication cost and it takes about the same amount of man hours to fabricate an ounce of silver as an ounce of gold, but the silver costs much less (61 times less currently) when it is sold therefore the premium as a percentage of silvers price is higher.
There is an argument to be made that any higher margins when buying silver may well be made up for by the potential for gains in silver being even greater than gold. Just a few of the reasons often sited include:
1) Silver still to reach previous highs. Gold has well and truly surpassed its nominal high from 1980 of US$850 whereas the price of silver is still someway off its 1980 high of US$50 when the Hunt brothers had basically cornered the silver market. Some would argue that these prices were “bubble-like” and not fair comparisons. However the likelihood is that gold and silver will eventually reach bubble prices again in this bull cycle. A general rule is prices usually make extremes in either direction at the start and end of a cycle.
2) Silver has even further to reach inflation adjusted highs. Gold has to rise to US$2420 to reach its inflation adjusted 1980 high of US$850. i.e. just under a double from here. Silver has even further to go needing to reach US$117 to match it’s inflation adjusted 1980 high of US$50. Almost 6 times higher than now.
3) The gold silver ratio is currently way above long term historical norms. This ratio is simply the amount of ounces of silver you can buy with one ounce of gold. Currently it stands at 61:1. In the last 25 years it’s been as high as 100:1 and as low as 38:1. The long term ratio (we’re talking hundreds of years here) is about 16:1 – the same as the ratio of silver to gold in the ground. At the end of the last bull market in precious metals the ratio reached 16. If it was to reach 16 again silver would have to rise significantly from here comparatively to gold. Even to reach the higher level of 30 would still be a large increase.
4) Silver is being used up? There is also the somewhat contentious argument that as silver has many more industrial uses than gold that it is being used up whereas pretty much all the above ground gold ever mined still exists today. So the theory being that the silver supply is steadily diminishing versus the gold supply which slowly rises every year (albeit at the moment not enough to keep up with increasing gold demand but we digress and that’s another story).
However this greater industrial demand is a doubled edged sword as this makes silver even more volatile than gold. It reacts even more to changes in the global economy.
So – silver is not for the faint hearted and certainly buying physical silver is not a short term investment but rather a long term speculation on the end of paper money. Or perhaps a better way to look at is financial insurance that also potentially has high upside.
Buying when the price has risen and getting close to previous highs is generally not the way to operate in the precious metals markets. However the flip side is that if new highs are made the price may well move rapidly higher from there before any further major correction. So conversely that could make now a decent time to buy. In NZ dollar terms the silver price is almost reaching it’s Feb 2009 high of $29.00 per ounce as we write. So we will watch with interest to see if it manages to break through this level. Our theory, like with gold, is to buy regularly to get a good overall price as buying in one hit trying to time the lows in the gold and silver markets is very difficult to do.
The fact that we are getting more questions on how to buy silver in NZ could well be evidence that “poor mans gold” may soon begin to play catch up with gold’s greater gains of the past decade. We are also hearing people say “I can’t afford gold at the moment so might just buy some silver instead.” If gold continues to rise there will likely be more and more people the world over adopting this approach.
Given this interest in silver we have gone about securing a deal for our readers to buy silver bars from a local Auckland, New Zealand silver refiner and supplier.
So if you’d like to know how to buy silver in NZ for only 10% above the silver spot price then visit the link below to learn how to get a quote…
Or if you’d like a quote right now Freephone 0800 888 464 or click the link below to see today’s indicative pricing and to learn how to