Why are most compasses liquid-filled? I assume it's because the liquid acts as a damper so the needle doesn't swing as much; is that it?

Almost all compasses I've seen have the problem of bubbles developing, especially in cold weather. I assume the liquid contracts in the cold, causing any residual air that was trapped inside during the manufacturing process to expand. If so, is it really that difficult to design a compass with an expansion valve in the base? Or is there some other reason why bubbles develop when it's cold, and then disappear after I store the compass in an inside pocket for 15 minutes?

Your assumption about the damping of the movement is correct.
The bubbles are supposed to be gas that was solved in the fluid. When the fluid contracts the pressure drops and the gas fills the room (the effect is the same as opening a soda bottle). When the fluid gets warmer, the pressure rises and the gas is forced back into solution. An expansion valve would lead to fluid loss when the compass is warm. That would obviously be not desireable.

I have heard of some form of silicone fluid being used in active solar collectors, which carries more btu's per gallon, and is not as likely to have air dissolve in it.

If the air aspect is correct, wouldn't this be a better fluid to use in a liquid filled compass?

I have also heard that Australia is very big on solar and hot water panel use for electricity and heating. Can any of our Australian members give us a "heads up" on the best current technology regarding the liquids used for heating panels?

Bountyhunter