Both silver and gold appeal to investors in a bear market. However, these two metals are not created equal. Whenever the economy is dwindling and inflation is rising, investors mostly rush to gold. Additionally, silver is also regarded as a haven investment, though it gets significantly less hype.
Throughout history, both of these precious metals have been quite popular among investors. They are always appealing whenever currencies and stocks lose value. Last month, pandemic worries together with a weakening US dollar sent gold prices exploding above $2,000 per ounce for the first time in its history.
Silver has also rallied. For the first time in 7 years, silver prices surged to $28 per ounce in August which is a 140% gain from its 2020 lows. Even during the good times, most of the investors keep a small percentage of their assets invested in gold or silver as a portfolio diversification strategy.
While silver and gold have some resemblance in their boom-and-bust cycles, there are several notable differences to consider when determining whether investing in silver vs. investing in gold is a better move.
Gold Is More Expensive Because Of Small Supply
Gold can be quite prohibitively expensive in the instance that you want to buy the physical metal. Looking at the gold-silver ratio, it is evident that you will need many ounces of silver to buy one ounce of gold.
The gold-silver ratio was significantly higher back in March, breaking 120-to-1 for the first time in history. The 21st-century average is around 60-to-1. At the market close on September 10, the gold-silver ratio was around 72-to-1. It means that if you are going ounce for ounce, gold was 70 times more valuable compared to silver.
It means that even when silver is becoming expensive, there is a reason why it is referred to as ‘the poor man’s gold.’ On the other hand, gold is more expensive since it is by far the rarer metal. Globally, just 3,300 tons of gold were mined in 2019 compared to 27,000 tons of silver, as recorded by the U.S. Geological Survey.
Silver’s Industrial Application Makes Gold The Ideal Hedge
The prices of gold and silver seem to move in the same direction most of the time. However, gold is a better recession hedge. More than 50% of the demand for silver is mainly driven by its countless industrial uses. It is widely used in automobiles, electronics, medicine, solar panels, manufacturing, and much more.
Since it is so integral in industrial activity, the demand for silver seems to rise and fall with the general economy. When production starts picking up, silver prices are probably going to increase. In the case that it slows, silver also tumbles.
Gold in most cases surges whenever the stocks are down. Since December 2007 up to May 2009, the Great Recession, the price of gold gained 24% while the S&P 500 fell 37%. Not only do investors drive up the prices of gold in a bear market, but the precious metal is mostly insulated from the slowdown in economic activity since industrial uses are quite limited.
However, in the long-term, S&P returns have historically crushed the returns on gold.
Silver More Volatile Than Gold
Short-term fluctuations in gold prices in most cases receive a lot of attention. But, gold is quite stable as a long-term investment. The yearly volatility of gold was only just higher than the annualized volatility of the S&P 500 in the 30 years between 1989 and 2019. The silver market’s small size compared to the gold market makes it quite exposed to wild price swings.
Silver is mined at eight times the rate of gold. Nonetheless, gold is currently at least 70 times more valuable compared to silver looking at an ounce-for-ounce basis. Hence, the general silver market is worth just a fraction of the gold market.
Adding to that volatility, over 70% of the silver supply is produced as a byproduct of mining for many other metals including gold and copper. That makes the silver supply responsive to most of the changes in demand.
Since silver is also quite volatile, it seems more appealing than gold for anyone seeking to speculate on the short-term fluctuations. But while acting as a long-term hedge, gold is quite attractive.
A Golden Investment Chance
While a majority of the investors seek out gold and silver in their physical form; like coin or bullion, a significantly better option is normally to invest in mining stocks. You can avoid many issues that come with storing and selling physical silver and gold, and you may also earn dividends. For anyone seeking more diversification, a silver ETF or a gold ETF becomes a better option.
However, experts say that both gold and silver are risky assets. Taking into account the rule of thumb, they should not account for over 10% of the entire portfolio. Investing in the precious metal markets is quite an effective hedge against an economic downturn. But when you consider long-term performance, the S&P 500 glitters more than silver or gold itself.
For now, the precious metal markets keep making history by setting records after records. Nevertheless, the stock market is still booming due to the tech stocks that are performing exceptionally well despite the pandemic. Investors are encouraged to diversify their portfolios to ensure that they survive in these uncertain times.