Friday, April 21, 2006


The price of silver has risen significantly over the last three years. From less than US$5.00 per troy ounce, the price reached a peak of US$14.27 earlier this week before experiencing a very sharp fall. It currently trades at around US$12.62.

Silver is often compared with gold as a "precious metal". While the two metals often move in tanden, silver has historically been more volatile than gold and the current bull market has been no exception. Silver does differ from gold in a number of very significant respects:

1. almost all the gold ever mined is still in existence and generally in a form which can readily be brought to market;
2. the vast majority of the gold mined is brought for investment - only a small proportion is used for industrial purposes. Put differently, this means that gold is valuable because people believe it is valuable (or attractive) not because it us useful;
3. in contrast, silver is largely used for industrial purposes and a significant proportion of it is not recovered after use;
4. notwithstanding the decline in the use of film photography, the demand for silver has exceeded the supply from mining and recyling for most, if not all, of the last decade or so (the deficit has allegedly been met by sales from dwindling stockpiles);
5. the exact figures for supply, demand and stockpiles are uncertain (at least I have had difficulty getting consistent figures from sources I would consider reputable);
6. silver is still viewed as a precious metal by many - reasonable quantities are converted into ingots and coins and sold to investors each year;
7. I have had difficulty getting a clear picture of the amount of silver still in existence but, whichever number is used, the value of the world's stockpile of silver would appear to be less that the market capitalisation of some of the worlds larger listed companies. In a global context, even a relatively small increase in demand from investors could have a material effect on price.

In summary, silver is attractive as an investment on supply and demand grounds in spite of the recent volatility. The harder question is whether it is still attractive at current prices.

One problem with silver is that it does not generate any income which makes it a slightly awkward fit for the retirement plan outlined in earlier posts. However, until such time as I retire, I do not need any income from my investments so that issue does not need to be addressed for some years.

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