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Gold or Silver – Batman or Robin?

Gold & Silver Prices graph

Investing in Gold or Silver? A common dilemma investors often face with regards to which precious metal should be on their portfolio. As both are valuable commodities, their global supply is limited. But there are specific properties that set the two metals apart, investing in one particular metal a natural choice for most investors.

Volatility


Unlike gold, the supply and industrial demand for silver are much more significant. Silver is used for soldering, batteries, dentistry, glass coatings, etc. Mine production of silver accounts for approximately 85% in supply, while industrial application constitutes almost 56% of total silver demanded. With regard to gold, it is produced in limited quantities. Only about 2,500 tons of gold are mined globally, annually, with an estimated 54,000 metric tons in global reserves. Gold is a relatively rare commodity than silver.

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Keeping the demand and supply conditions of gold and silver in mind, we can note that the bigger silver market values are much less than the smaller gold market. The supply conditions of silver, make it a more volatile product, susceptible to variable market conditions, and hence price fluctuations. In other words, even though the silver market supply is much larger than that of gold, the lower price of silver makes the annual value of silver supply much smaller than that of gold.

The graph below shows how silver compares with the market capitalization of individual popular stocks.

Therefore, it takes a relatively small amount of money to create a more significant impact on the silver market. This results in the prices of silver rising more than those of gold on certain good days, while they fall more than those of gold on bad days. Depending on a bull or bear market, prices of silver have performed differently in different settings.

The examples below show how silver and gold have played in some of the biggest bull and bear markets in modern history.


The higher volatility in silver, and the table above, suggests that silver will outperform gold in bull markets.

Affordability


Silver is the more affordable metal. However, the reason this is important is that an investor can benefit in similar ways from purchasing physical silver (not paper investments such as ETFs, certificates, or futures contracts), at a lower price, than from making a gold purchase at a higher price.

Like gold, silver is:

  • Tangible – In this digital age of paper profits, digital currency, and digital trading, intangible assets are commonly used to make substantial investments. However, silver and gold are tangible assets that can easily be assessed, monitored, and tracked. 
  • Highly Liquid – Both silver and gold are liquid assets, which means they can easily be converted to cash. Whether to make small or large payments, silver and gold can easily be traded in for immediate cash payments.
  • Default Risk & Counterparty Risk-Free – Gold and silver, alike, have no default risk as there is no issuing entity that could go bankrupt or that could default.

Silver may come with volatile prices and some uncertainty, but it is a more affordable metal. The average investor can purchase silver in smaller denominations, enabling him to make quick cash when needed for low, insignificant immediate payments like that of a phone or medical bill.

Storage


The affordability of silver comes with a small catch: it needs more storage space than gold. At the current prices of $1,733.10 for an ounce of gold and $17.49 for an ounce of silver, at the same dollar value investment, say $5,000, one can get roughly 98.9% more ounces of silver than gold. Isn’t that a lot? But how would you manage to store all this silver? With a density of 10.49g/cm³, silver is known to be much less dense than gold, with a density of 19.32g/cm³.

The fact clearly indicates that silver bars are much larger than gold bars and hence take up more surface area. It is said that one could hold about $50,000 worth of gold in one hand, but it may take approximately ten large shoe boxes to keep the same amount’s worth of silver. If this is true, one could be almost sure that keeping silver does not only require space; there is a lot more to it.

Investing in silver pertains to incurring individual storage costs higher than those that one would pay to hold gold. As silver is less dense, it takes up more space and is cumbersome to deal with, and hence professional storage costs are a lot higher with most depositories. Transporting silver bullions, unlike gold bullions, is not only difficult but expensive and burdensome. Silver, again, unlike gold, will eventually wear out if exposed to the elements; it cannot withstand moisture or light. It needs to be stored in a dry place, locked away, and prevented from the weather forces.

Industrial Uses


While the industrial demand for gold is just about, between 10% and 15%, the need for silver is an enormous 56% of its annual supply. Silver is used in almost everything you see around in your house. From electronics and batteries to dentistry and solar panels, you name it; its uses are extensive. This allows for a more significant impact on silver in periods of booms or slumps. When the economy is flourishing and doing well, the demand for silver is high, when the economy is in a recession, demand for silver falls. However, it is essential to note that unlike in the scenario with gold, where supply increases by recycling leftover remnants from its industrial uses, silver cannot be recycled; instead, it is thrown away after being used. It is uneconomical to recover every minute shaving or chip of silver after being used in the industrial processes. The supply of silver is, thus, limited. Linking back to our earlier discussion, and following the facts stated above, you may want to question whether the prices of silver rise in times of economic booms and fall in economic busts. Let’s take a look at this situation.

Considering one of the worst economic situations of all time, the financial crisis of the 1970s, we will look at the development of silver prices. The second half of the decade of the 1970s, the end of the post-World War II economic boom, was met with much apprehension and fierce economic depression. The world battled with a severe energy crisis, with oil prices rising to above 70%, high unemployment looped with a high inflation rate accelerating to over 20%, two recessions, the Russian invasion into Afghanistan, and ongoing cold war tensions. With all economic forces at work and the world going topsy-turvy, one would expect that silver prices would reach their most dreadful fall. This, however, was not entirely true. The uncertain global economic conditions did well for the prices of silver. While investor confidence in the dollar dwindled, people began to increase their purchases in silver, aiming to hedge their portfolios from the economic turmoil and global chaos. As a result, silver played its role as money, which had a booming impact on metal prices. The graph below illustrates the price trend of silver during the 1970s crisis.


The above discussion gives investors a broader perception of the properties of gold and silver. Silver may seem like an excellent choice to make; gold has always been the prime choice of most investors. Investing in gold and silver entirely depends on the investor’s goals, life choices, and plans. Analyzing your portfolio, your goals, and your plans will enable you to make the right, fitting choice between the two metals. Whether to buy gold or silver, is not a judgment of prudence or intelligence, it is of patience and predictability, of waiting and understanding economic and financial situations.

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