Silver's volatility gives canny or lucky speculators a good ride

Friday 4th August 2000

Movements in the London price of silver in recent years, and since the end of 1999, have been more volatile than for gold. The difference between silver's high and low this year has been 10.3% taking the high as a base figure for the calculation, but 12.9% for gold.

There were also wide differences between the two metals' highs and lows on an annual basis in the past five years, which can be seen from the movements in Tables II and III. The volatility of the silver gave speculators a good ride if they picked the highs and lows correctly but made them fall heavily when they were on the wrong side of the market over the period.

Private investors have three choices with silver: bullion (bars), coins and silver objects, either modern or antiques. Silver coins differ from the three major gold coins traded, because they can have a value above that of the basic silver content.

Coin dealers tend to assess total value with reference to condition, rarity, age and any notable history. Dealers have told NBR Personal Investor in the past that age is not necessarily a test of value. That is the case with any collectable, but it seems clear that if individuals were lucky enough to get their hands on, say, a bag of coins minted in antiquity and which had considerable rarity, they would have items of considerable value.

There is a basic problem related to investment in silver as a metal. Its much lower price than gold means investors and traders have to hold considerable quantities to get a solid profit in dollar terms during price fluctuations. Potential investors in silver metal should also note that the highs of the London price in the four years 1987-90 were respectively $US10.92, $US7.82, $US6.21 and $US5.35. Those figures can be compared with the listings in Tables I and II.

The market for silver objects, basically a collectibles market, has always been markedly different from that for bullion and coins. Movements in the bullion prices have a small relationship to prices for antique silver.

The basis of the antique market's assessment was set out in a National Business Review publication 10 years ago. It was noted antique silver was judged by its mark and the work of particular guilds. The 18th century Irish silversmiths of the Dublin guild were considered the finest under the English guild system.

There was a distinction between the English and European guilds. Antique silver from France was of high quality, but English items were considered more important as an investment, being the only silver with consistency in silver content and dating. The system has been consistent since Edward III set it in 1377.

Silver content could move about in other countries, but in English and Scottish guilds the pure silver content was 925 parts to 1000, which was expressed as .925 content and called the "sterling content." Copper made up the rest of the content and was used to harden the product.

The system created an international market for English silver, because everyone knew the content and date, with items from earlier times being more valuable than later ones, although an important maker's production could raise the value of items made in the same year when compared with others.

Antique dealers have said silver objects should be considered a long-term investment. Gains come slowly but the objects have a practical value in that they can be used while you wait for the capital appreciation. You are unlikely to do that with gold, unless you dine with billionaires.

Anyone trading in silver has to be aware of the supply and demand situation, which the US Hunt brothers learned to their substantial cost when they raided the silver market in 1979-80 and tried to corner it. The London price hit an all time high of $US50.35 in January 1980 when the Hunts threw billions of their oil wealth into silver. They were caught, because the more silver they bought the more that came available.

No accurate estimate existed of how much silver there was in the world and the situation is unlikely to have changed in the intervening 20 years. The position in India was, and is, indicative of the problem. Silver in India has been the basis of many families' assets. That apparently applied in many other countries and it was impossible to calculate the amount involved.

People went crazy about silver in 1980. I will never forget watching people bringing silver objects to the bullion department of a major Dublin jeweller to have them assessed for the bullion value, in some cases more than their antique value.

There were reports in international newspapers that similar scenes were seen in other cities, apparently because some of the owners intended to have objects melted to bullion and take the money.

The Hunt brothers were unable to keep buying and the silver price collapsed. Apart from specialist silver mines, the metal is often produced as a secondary item from gold mining or in conjunction with base metals (lead, copper and zinc).

The Martha Hill mine on the Coromandel, for example, produces silver as well as gold. Modern mining technology can lead to another supply problem, because it allows extraction of previously uneconomic deposits. Potential investors in silver should remember there are clouds behind those silver linings.

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