Diana Clement: Finding the silver lining in a recession

Is now the time to buy silver and commodities? Several thousand people, myself included, went to see Rich Dad Poor Dad guru Robert Kiyosaki speak when he toured the country this month.

The man reckons he's responsible for creating more millionaires than anyone else. Some of his predictions for our financial future can make Kiyosaki sound like a doomsday merchant. But the one that interested me was his insistence on the merits of investing in silver.

In his latest book, Conspiracy of the Rich, which can be read online at Conspiracyoftherich.com, Kiyosaki labours his view that we're on the verge of a "German-style" inflationary depression where savings will be decimated by high inflation and that smart people are preparing for it.

"These people are accumulating gold and silver coins, some cash, and investments that adjust for inflation. Examples of such investments are oil, food, gold and silver stocks."

The trigger, he says, is the trillions of dollars being printed by the US Federal Reserve. With no gold standard to back the action, the value of cash will fall. Silver, on the other hand, holds its value.

Kiyosaki's argument is that gold, while valuable, is hoarded and an estimated 95 per cent of all gold ever mined is still around. "The exact opposite is true of silver: an estimated 95 per cent of all silver ever mined has been consumed," Kiyosaki said.

Jason Hommel, who writes the Silver Stock Report, points out that 95 per cent of mined silver available each year is used. He says 42 per cent is consumed by industry, about 28 per cent by jewellery, 20 per cent by photography and 5 per cent in coins and medallions. That leaves only 5 per cent for investors to hoard.

Another figure trending in silver's favour is the gold/silver ratio - the number of ounces of silver to buy one ounce of gold - which stood for hundreds of years around 15:1 and, even with highs in recent decades taken into account, has a long-term mean of 30:1 over the past 350 years. On Wednesday it was 66:1, although that has fallen significantly from the 1991 high of 100. Some investors even trade the gold/silver ratio.

Demand for silver is high, especially for industrial uses. It is one of the best electrical conductors of all metals and it does not corrode. Every time you buy a microwave oven, dishwasher, clothes washer or television, you buy an appliance with silver in it.

While there is clearly a case for demand - even though silver's use in photography is declining - there is a shortage on the supply side and there is often not sufficient mined silver to meet demand.

What's more, argues Kiyosaki, silver retains its value if the value of currency drops - making it a good hedge. In Auckland he repeated several times that "cash is trash" thanks to the Fed message.

Kiyosaki has his detractors when it comes to investing in silver. A quick Google search finds that Kiyosaki allegedly owns silver mines - and would have a vested interest in wanting you and me to go crazy buying silver. But he is right in saying that precious metals, silver included, hold their value over time - even if there can be short-term volatility. Silver is also a hedge against inflation.

It's also typical that by the time an article like this hits the newspapers the prices have already risen.

Silver started 2009 at US$11.08 ($17.36) an ounce. On Wednesday it was US$13.81 ($21.63). However, the highs and lows since January 2000 have been US$4.06 ($6.36) an ounce in November 2001 and US$19.30 ($30.23) in July 2008.

It's all well and good telling thousands of people in Auckland and Christchurch to invest in silver or be damned. But how Kiwis invest in the precious metal is a bit of a closely held secret. I certainly got a few "dunnos" when I started asking around.

One of the best ways to get exposure to precious metals is by investing in mining companies, says ASB Securities' Stephen Wright. Usually the easiest way to do this is to buy shares in Australian mining stocks. But unfortunately there are very few pure silver plays.

One, Macmin Silver, went into voluntary administration at the end of last year, says Wright.

Others such as Silver Mines, which is involved in exploration, not active mining yet, and is trading around 5c a share, are small.

Most silver mines are owned by large diversified mining companies, which mean you can't simply get an exposure to silver. In fact only about a third of the world's silver comes from silver mines. The rest is a byproduct of other mining operations. One of the largest of these is BHP Billiton, which is listed on the ASX.

Details of listed silver mining companies are available on Minesite.com. They are mainly traded on the Toronto Stock Exchange (TSX), Australian Stock Exchange and on the Alternative Investment Market (AIM) run by the London Stock Exchange. Many of these stocks can be bought via New Zealand stockbrokers - but with high brokerage costs - which can eat into returns.

Wright says one of his clients buys and holds silver ingots as well as mining stocks.

A small number of dealers, such as Morris and Watson in Auckland (www.morrisandwatson.com), sell silver bullion. On Wednesday Morris and Watson was selling silver granules for $845 a kilogram, or $867.50 for a 1kg ingot. Pure silver is GST-exempt.

It's also possible to buy silver coins from the NZ Mint. A one-ounce silver dollar cost $29.60 on Wednesday - plus courier charges if you couldn't pick it up. A 1kg bar from the NZ Mint was priced at $951.50 on Wednesday plus delivery. The NZ Mint also offers storage facilities at 10 per cent of the value of the silver per year.

In order to make a capital gain on silver bullion the price needs to rise significantly to cover the margin taken by the mints, and the storage costs, if any. While Morris and Watson was selling at $867.50 on Wednesday, it was buying back at $663 a kilogram.

The other problem with buying the metal is that while 1kg of gold doesn't take up much space, 66kg of silver, which would be worth the same, doesn't fit well under the mattress or in the top drawer of your desk.

Exchange Traded Funds have far slimmer margins. The Barclays iShare Silver Trust, which trades on the New York Stock Exchange, is probably the best known. It invests across many silver industry companies and is backed by physical silver. Others include ETFS Physical Silver Fund, which trades on the LSE.

The other way that an increasing number of DIY Kiwi investors are getting exposure to silver is with Contracts for Difference (CFDs). You buy a CFD over the spot silver price or silver futures from a company offering them. You are not buying the physical silver, merely trading a product (derivative) based on the price of silver and its liquidity.

Typically you will be buying on a 1 per cent margin, outlaying, for example, US$13.75 on a US$1375 CFD with the balance effectively borrowed from the company offering it, says David Barrett-Lennard, commodities dealer at CMC Markets.

When (if) the price of the silver has risen, you repay the loan and the interest and take any profits. You can also "go short" with CFDs, meaning that you can enter a sell transaction and profit from a falling market.

Barrett-Lennard says typically CMC Markets' silver CFD clients are short-term traders. But it is possible to take a medium to longer term investment position.

Companies that offer this type of trading in New Zealand include CMC Markets and IG Index. The downside of CFD trading is that it can be risky and is hands-on. It is not for the buy and hold investor because of the on-going holding costs over the loan.

www.silverinstitute.org

www.silverstockreport.com