Gold and silver are often considered as a hedge against inflation and economic or market downturn. Understanding the differences between the two metals can help investors determine which metal may benefit their portfolio.
Difference No.1: Industrial Use
The utility of precious metals sets them apart from other commodities. Unlike commodities like coffee or lumber, where value is often tied to supply and consumer demand, gold and silver have relatively low commercial utility. While gold is primarily used for jewelry and investment purposes, silver has extensive industrial applications, including smartphones, tablets, and solar-panel cells. This divergence in utility influences their market dynamics.
Difference No.2: Historical Performance
As pointed out by Bruce Liegel, a macro fund manager and author of the investment newsletter Global Macro Playbook, “Silver has underperformed gold over the last 10 to 15 years. Silver is a much more industrialized metal than gold is. Gold is really an investment and usually for safe haven keeping, while silver has always been the cheap way to play it. But now you don't have to do that because you can gold ETFs these days, and it doesn't require a large sum of investment to get involved.”
Difference No.3: Volatility
Historically, silver is known for its higher price volatility compared to gold. This volatility stems primarily from supply and demand dynamics. Silver, being an industrial commodity, experiences consistent demand, although not as stable as the demand for gold, which is often perceived as a safe-haven investment.
Difference No.4: Relationship to Broader Market
Read More: Institutionalization of Gold
Gold and silver exhibit distinct relationships with the broader market. Gold is considered a "countercyclical investment," tending to rise when mainstream assets decline. During economic downturns, investors often turn to gold for liquidity. On the contrary, silver is more closely tied to the overall economy due to its industrial applications. When economic activities slow down, the demand for silver in manufacturing decreases, affecting its price.
Difference No.5: Diversification Power
Both gold and silver can serve as portfolio diversifiers, but gold is often regarded as a more powerful diversifier. Gold has maintained consistent uncorrelation to stocks and shown low correlations with other major asset classes. Silver, while still a good diversifier, exhibits moderately weak positive correlations to stocks, bonds, and commodities. The limited industrial uses of gold contribute to its resilience during economic declines.
How to Invest in Gold and Silver
Investors have various options to add gold and silver to their portfolios:
Read More: Commodities as an Investment Option
Exchange-Traded Funds: ETFs provide the easiest exposure to gold and silver, and popular options include SPDR Gold Shares (GLD) and iShares Silver Trust (SLV).
As explained by Liegel in his newsletter Global Macro Playbook, “Gold has over $200 billion in their ETFs for gold tracking. Silver is a lot smaller, maybe a third of that. These days we are seeing a lot more institutional money flow into GLD type of instrument. So as an individual investor if you want to invest in gold, GLD is probably the easiest vehicle for you to invest in.”
Physical Metals: Purchase gold and silver as physical assets in the form of bars or coins, either held in a brokerage account or a retirement account. Consider downsides such as premiums, storage costs, and insurance.
Mining Stocks and Funds: Investors can explore opportunities by owning shares in companies involved in gold and silver mining or through ETFs holding portfolios of these mining companies. But note that the mining companies have underperformed the precious metals they are mining in the past.
Read More: A Generational Change in Central Bank Interest Rate Regime
“The problem with buying those gold miners is they have underperformed,” remarks Liegel. “GDX, which is the ETF tracking major miners, has underperformed gold by about 40% over the last 10 years. And GDXJ, the junior miners, has underperformed gold by over 70%. What's going on in gold is that a lot of the institutional money can now just buy gold ETFs. In the past, they had to go buy the individual stocks, but now they want the direct correlation to gold. So these investors would buy GLD or another type of gold ETF that tracks the price of gold, instead of those ETFs that track miners.”
What is Gold-Silver Ratio
The gold-silver ratio, also known as the mint ratio, is a crucial metric in the precious metals market, signifying the relative value of an ounce of silver compared to an equivalent weight of gold. In essence, it represents the number of ounces of silver necessary to purchase one ounce of gold. Investors and traders alike can utilize this ratio to diversify their precious metals holdings and make informed investment decisions.
Read More: Review of GLD ETF (SPDR Gold Shares)
To illustrate, if gold trades at $1000 per ounce and silver at $20, the gold-silver ratio stands at 50:1. Similarly, if gold prices surge to $2,000 per ounce while silver trades at $25, the ratio becomes 80:1. Today, this ratio fluctuates dynamically, exhibiting significant volatility.
By monitoring this ratio, investors can gain valuable insights into the relative value of gold and silver, potentially leading to informed trading strategies and portfolio diversification decisions.
Importance of Gold-Silver Ratio for Investors
It’s a common strategy for investors in the precious metal market to make trading decisions based on the gold-silver ratio. The most widely used approach involves hedging a long position in one metal by taking a short position in the other.
For instance, when the ratio is at historically elevated levels, signaling an anticipated decline that mirrors a potential decrease in the price of gold relative to silver, investors often opt to buy silver while simultaneously short-selling an equivalent amount of gold. This strategy aims to capitalize on the expected favorable price performance of silver compared to gold, with investors seeking to achieve a net profit from this relative shift in prices.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
