The big Southlander clocked an excellent 13.399 to again lower their best sea-level time to 43.544s but a stunning lap by Maximillian Levy gave the edge to the Germans by the narrowest of margins.
"Half way around that final Lap I thought we would hold it but Maximillian is not a world champion for nothing," said Grace.
"It's mixed emotions. The boys are gutted they could not win the rainbow jersey but at the same time they did another best ride and have a silver medal.
"We are still so young. Simon is the oldest in our squad of five riders at just 24, with Matt Archibald not here. We used to come to the world championships for experience and now we come to win.
"We set this programme up originally for Rio but they have advanced so quickly and continue to better our projections. We now have the respect of the world cycling powers from countries with 80 to 100 million people and massive budgets.
"That's a credit to the BikeNZ programme, the support of High performance Sport New Zealand and also the talent, dedication and hard work of this group of young riders."
Earlier France edged out Australia to claim the bronze medal.
New Zealand's team sprint were fifth in the 2010 world championships in 44.450, sixth in 2011 in 45.032, third last year (after two disqualifications to other teams) in 43.742 and now they have lowered this to 43.544.
New Zealand's sprinters are back in action tomorrow with Olympic medallist Simon Van Velthooven and Dawkins in the keirin while Aaron Gate begins day one of the six-discipline omnium.
- nzherald.co.nz