Gold and Silver: What are the main differences?

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Investors rush to gold when the economy is in trouble and inflation is high. Although silver is regarded as a safe-haven asset, it receives a lot less attention. Both precious metals are highly sought-after throughout history. This makes them attractive when currencies and stocks lose value.

Pandemic fears and a weakening U.S. Dollar led to gold prices soaring to $2,000 per ounce in August. This was the highest price ever recorded in American history. Silver prices have also risen. Silver prices rose to $28 per ounce in August for the first time since 2013. This is a 140% increase over its 2020 low.

Many investors invest in silver and gold as part of their portfolio diversification strategy, even in times of good fortune. Although silver and gold have similar boom-and–bust cycles, there’s a lot more to think about when deciding whether gold or silver investment is the best move.

Due to its small supply, gold is more expensive

If you are looking to purchase physical gold, it can be expensive. Let’s take a look at the gold-silver ratio. This tells you how much silver you would need to buy one ounce of gold.
At market close September 9, the ratio of gold to silver was approximately 72:1. This means that gold was 70 times more expensive than silver per ounce.

In March, the gold-silver ratio was much higher than it is today, surpassing 120-to-1 for first time in history. However, the average 21st-century ratio is 60-to-1. Translation: Silver is not expensive but it’s still known as the “poor man’s gold”.

Because it is a rarer metal, gold is much more expensive. According to the U.S. Geological Survey, only 3,300 tonnes of gold were produced worldwide in 2019. This compares to 27,000 tons silver.

Because of its industrial uses, silver makes gold the best hedge

Gold and silver prices tend to move in the same direction, but gold is a better recession hedge. More than half of the demand for silver is driven by its countless industrial uses. It’s widely used in electronics, automobiles, solar panels, medicine and manufacturing, to name a few.

Because it’s so vital to industrial activity, demand for silver tends to rise and fall with the overall economy. When production picks up, silver prices are likely to increase. If it slows, silver often tumbles. Gold usually surges when stocks are down. From December 2007 to May 2009 — aka, the Great Recession — the S&P 500 fell 37%, but the price of gold rose by 24%.

Not only do investors drive up gold prices in a bear market, but the yellow metal is relatively insulated from slowdown in economic activity because industrial uses are so limited. In the long term, though, S&P 500 returns have historically crushed returns on gold.

Compared to Gold, Silver is more volatile

Although short-term volatility in gold prices is often the focus of media attention, long-term investments like gold are relatively stable. During the 30-year period 1989-1999, the annualized volatility for gold was just slightly lower than that of the S&P 500.

Because the silver market is smaller than the gold market, it can be subject to wild price swings. Silver is mined at a rate eight times that of gold. But, gold is currently more valuable than silver on an “ounce-for-ounce” basis. Therefore, the silver market is only a fraction of what the gold market is.

Volatility is further exacerbated by the fact that more than 70% of silver production comes from mining for other metals like copper or gold. This makes silver supply less responsive and flexible to changing demand.

If you are looking to speculate on short-term fluctuations, silver may be more attractive than gold because of its volatility. Gold is more appealing as a long-term hedge.

Is it an Investment Opportunity?

Many investors are looking for gold and silver in physical forms, such as bullion coins or coins. However, it is better to invest in mining stocks. Additionally, you can avoid the hassles of selling and storing physical gold and silver and may even earn dividends. A gold ETF or silverETF is a better choice for those who want to diversify.

Remember that gold and silver are risky assets. They shouldn’t make up more than 10% of your total portfolio. A hedge against downturns is possible by investing in precious metals. The S&P 500 shines more than silver and gold when it comes long-term performance.