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The age-old debate of gold vs silver is almost as old as the metals themselves. Since the onset of currency, if not civilization altogether, the two precious metals have been pitted against one another.
We're all familiar with the view of silver being a cheaper alternative to gold. The truth is, of course, a lot more nuanced. Even centuries ago, while gold was scarcer and therefore more expensive and silver was "everyday currency", both metals had uses far past exchange. And their respective utilities have grown exponentially as both society and technology advanced.
Gauging how gold fares against silver in a portfolio requires a careful assessment of both metals. The deeper one gets into each, the more one understands the subtle but pronounced differences. Yet they are also intertwined.
The bond between gold and silver is never abandoned: as gold moves up, silver follows. But why and how it follows is something we'll go over down the line. Since we did say that silver is the one trailing gold, let's start by analyzing "the question" first.
Is Gold a Better Investment than Silver?
There's always a short answer and a long answer. For the short answer, we'll dare tread where so many wouldn't and say: yes. Gold does indeed trump silver as an investment. Before silver enthusiasts get the urge to cut us down to size, let's go over our rationale for the short answer:
Gold is worth more
An ounce of gold is worth over 70 times more than an ounce of silver. That means people, whether experienced investors or everyday folks, view gold as just that: far more valuable. Material value is based on perception just as much as it is on something's actual worth, and here, gold emerges triumphant by a wide margin.
Gold has more recognition
We've had the gold standard, but we haven't had a silver standard. There are several reasons for this. Gold price both moves more predictably, in a good way, and is viewed as "the" thing of value. There are things more valuable than gold on an ounce basis, but they do not approach its liquidity, ability, recognizability, utility, widespread use and so on.
Gold has passed every safe-haven test
Adding to the aforementioned point, the price of gold is incredibly robust. Silver has had massive swings up and down. Decades ago, it sat at double the price it does now due to market manipulation. Platinum used to be more expensive than gold, and now it's roughly half its price. Palladium, a frequent underperformer, now costs more than gold. Throughout all these wild swings, gold has mostly had a steady uptrend. Its valuations are never overly excessive, nor does it find itself in strange slumps.
Gold is the most refined metal
For what it's worth, and it makes quite a difference for some, physical gold is more durable than silver in the sense that it doesn't tarnish. It can chip off, but being what many consider "just short of perfect" in the sphere of metallurgy, it doesn't take blemishes. Silver is, quite literally, a precious metal of inferior quality. It requires more maintenance, making it less popular and perhaps iconic for jewelry, though certainly far from unpopular.
Now that we went and gave you the short answer, it pays to go over the long answer. Understanding gold and silver investment requires a fair bit of economic knowledge. We can't just look at the price, lest we fall into platinum's folly. Rather, we must examine the underlying forces of both metals to see what has given them their status, reputation, and indeed value.
Gold vs Silver - Which is a better investment?
What Role Does Gold Fulfill in a Portfolio?
It's often said that gold is the most accurate track of inflation, or simply that it tracks it. That is very much correct.
There are many gauges of inflation, such as the Consumer Price Index (CPI), but they range from inadequate to outright deceitful. Numerous analysts continue to point out how the Federal Reserve's, or any other government's inflation gauge, is incorrect.
The best way to assess inflation and how much your purchasing power has eroded over time is to simply check the price of gold. Gold is valued primarily in U.S. dollars, and the weaker the dollar gets in the grand scheme of things, the more expensive gold gets.
The same holds true for every other currency. Actually, gold has performed even better in other currencies over the last couple of years, and that says a lot considering it hit a new all-time high two years ago.
The other big thing that gold does in a portfolio is hedge against risk. Gold has withstood the test of a truly remarkable number of crises and economic downturns, which has given it its spot at the top.
Stock bubbles, bond bubbles, real estate bubbles, crises, depressions and downturns. We've heard of all of these, and in all of them, gold has held onto its price or, more often than not, appreciated considerably.
On the other hand, when's the last time we heard of a gold market bubble? The closest one we can remember is the price fall from $1,900 an ounce after 2011.
As it lingered around $1,200 an ounce over the next few years, many wondered if that level can be recaptured in any reasonable timeframe or if it was a freak occurrence.
A decade later, $1,900 is considered "hard support" for gold, and many are expecting a major breakout over the next few years.
Related: Diversify Your IRA with "Alternative Assets" Like Gold and Silver
What Role Does Silver Fulfill in a Portfolio?
It might be reasonable to say that silver fulfills all of the aforementioned, just not as well. But it makes up for the "not as well" in other areas.
Like gold, silver is primarily viewed as a hedge and safe-haven, even though industrial demand is just as relevant. It holds onto value very well, despite some considerable price oscillations.
While gold has many industrial uses, they are secondary by far. On the other hand, silver's are not.
Even though it is a mainstay when it comes to investment, for manufacturing purposes, one might compare it to the likes of copper or nickel. Industries like solar panels and electric vehicles can't make do without this metal, and they're expanding rapidly.
While gold is also a key ingredient in some industrial components, this facet of the market is minor compared to silver.
Gold vs silver... or Gold and Silver?
The hard truth is that anyone who can combine gold and silver investment does that. Rare is the gold investor who can resist having a silver exposure, knowing how different the fundamental drivers are.
Likewise, as the capital of silver investors increases, they probably won't be able to resist allocating more and more of it to gold.
Exchange-traded products have made it easier than ever to own both of these metals in incremental amounts and increase one's exposure. We aren't really fans of these, though, and much prefer physical precious metals.
Between one-ounce silver coins, 1/10 ounce and above gold coins and many different kinds of bars of both, physical investment options are aplenty. And, as any experienced precious metals investor will tell you, there's no replacing the real thing.
Related: Inside Look at Ben Shapiro's Gold Company
Why are Silver's Fundamentals Different from Gold?
As we mentioned, gold and silver prices move together. But their relationship is far from parallel. Silver often lags far behind gold and doesn't really post all-time highs or even passes hallmark levels when gold does. Instead, it simply "goes up".
This is due to a myriad of reasons. The silver market is a much smaller and less liquid one. When silver recently exceeded $1 billion of daily trading volume, it was a big deal.
Even more recently, gold had a daily trading volume of $145 billion, only the third-highest figure on record. While these volumes aren't really representative of the "real" gold and silver markets, those being the physical ones, they still tell a tale. Central banks stockpile tons of gold, but not of silver.
That's because gold's primary driver is sentiment. On the other hand, silver has a very pronounced industrial component. Unlike gold, it's dependent on economies doing well enough to use it in solar panels, EVs and the like.
When economies stagnate or crash, manufacturing halts and demand for silver on the industrial side is greatly diminished. This is offset by increased demand on the investment side, and this pulling effect from opposite sides can cause silver's price to linger or barely move upwards compared to gold.
It also bears noting that silver's supply picture is considerably different compared to that of gold. Certainly, both have a supply picture that makes physical investors happy: easily-available ore has already been mined, with mining operations becoming more difficult and challenging.
While gold is a "primary" mining metal in the sense that mines are opened for the specific purpose of mining it, silver is instead mined as a byproduct.
Most of the newly-supplied physical silver on an annual basis comes as a byproduct of mining industrial metals. This makes silver's supply side much more complicated and strained.
If silver demand suddenly increases, be it from investors or manufacturers, suppliers won't have an easy time adjusting, and silver prices will balloon. This is one of the reasons why silver so often attracts speculative interest.
Related: How to Move Your 401(k) to Gold and Silver (Tax-Free)
Is Silver a More Valuable Investment than Gold?
Everyone knows that both gold and silver are valuable, tried and true. But how valuable are they relative to other assets, as well as each other? Here is where silver begins to outstrip gold as an investment, even though we seemingly said the opposite.
With current valuations of around $1,900, gold is in a reasonable place according to most. Only those that can't stand it as an investment would like to see it lower.
There are many who believe that gold's price should be considerably higher based on a multitude of things, whether we're talking $2,200, $3,000 or $10,000.
Though not by any means viewed as off their rocker, those calling for gold to appreciate 5 times its current price are certainly gold bulls. On the other hand, those calling for silver to do the same could simply be called analysts.
We can't ignore the gold/silver ratio
Although the gold/silver ratio has some detractors, it has far more proponents, and even the detractors have to agree that it does what it's supposed to: track the price of silver relative to gold.
Throughout history, the two metals weren't supposed to diverge too far from their relative price. It was important to keep them in balance in the era of sound money. We couldn't have an excess supply of gold, or silver would become overvalued. And the other way around.
As we have moved away from hard money and currencies lost any kind of solid backing past the printers that churn them out, the ratio began doing strange things.
In what one might call classical times, it took 15 ounces of silver to buy one ounce of gold. In the 20th century, the ratio averaged 50:1, which is viewed as reasonable.
What seemed like an astoundingly and persistently high 80:1 ratio in recent times was somehow passed when the figure climbed to a historic 104:1.
It's not the first time it's happened throughout history, and history tells us plenty about what comes next. We've had the ratio approaching 98:1 in the 1930s and again in the 90s. Every time this happened, the normalization was forceful with silver's price rising multifold in short order.
1 oz Silver American Eagle Coins
We also can't ignore that silver is historically undervalued
Dating back to the 1980s, in the aftermath of Nixon untethering the dollar from gold, the yellow metal has moved in a steady yet tumultuous appreciating fashion.
$600 in 1980, then $300-$600 until 2006. From there, it was all up. It had not once moved back to $600 since then, staying double that even during "bearish" stretches.
Silver, on the other hand, traded at nearly $40 in 1980, followed by a similar slump. The level wasn't recaptured until 2011, when gold hit its all-time high of $1,910.
But from there, it fell to the current valuations of around $22. Reason tells us that silver should be trading at at least $40, given how it tracks inflation. Why isn't it? We can speculate, but the upside is clear.
Verdict
Anyone with an interest in gold and silver should take a page out of the portfolio manager's traditional approach. Though it is being reassessed, the adage used to be 60/40, or 60% of an investment portfolio in stocks and 40% in bonds.
Stocks offer riskier and larger returns, while bonds offer safer and smaller ones. It would be very odd to see a portfolio manager say that a choice needs to be made between stocks and bonds, and that 100% of a portfolio should go in either.
Precious metals investors shouldn't fall prey to such an unreasonable approach, either. They should understand that gold and silver both have their own place in a portfolio, and that one shouldn't be overlooked in favor of the other.
These days, when both stocks and bonds are looking as flimsy as ever, a greater exposure to precious metals is warranted. We can see how silver falls in the place of the stock market, and gold in the place of bonds.
- Gold provides safe "returns" in the form of preventing wealth erosion, but also gaining steadily, and protects against risk
- Silver offers considerably greater upside compared to gold due to its volatility, but can't be expected to perform as steadily and predictably in crisis times and otherwise
With such an approach, a portfolio with both room for returns and plenty of safety is made.
But, unlike in the case of stocks and bonds, the investor doesn't have to wake up every day wondering if today is the day when either market collapses.
