Gold vs. Silver: What’s the Better Investment?

Gold and silver are two popular investments for those looking for assets that can be both value storage and inflation hedging. These precious metals are well valued and have a long history, but offer different types of benefits and safety, and investors need to know how likely they are to perform in multiple economic climates before deciding to invest in any of them.

Here are the relative benefits of gold and silver and what to look out for.

When it comes to the number of ways you can invest in gold or silver, investors have many options:

Each way of buying precious metal offers its advantages and disadvantages. For example, if you want to buy bars, you will have to protect them yourself, which makes it less secure than if you own it through an ETF. And owning an ETF that holds physical bars also allows you to get the full price of your participation in a public exchange, instead of trading it at a discount dealer.

Mining stocks allow you to have leverage on the price of gold or silver, so the winning miner will become much more profitable with the rise in the price of metals. But if investing in individual stocks is too risky and time consuming, you can buy an ETF that owns diggers and diversify your stake.

Whether you want to invest in gold or silver, you can do it in a way that suits your needs. But you will want to understand the dynamics of each type of investment.

How did gold and silver perform over time? Despite their reputation, not so favorable, says Robert R. Johnson, Ph.D., CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University.

Comparing the performance of silver and gold from 1925, Johnson notes:

  • “At the end of 1925, the price of an ounce of gold was $ 20.63. At the end of 2020, an ounce of gold sold for $ 1,893.66. During this 95-year period, the precious metal returned 4.87% per year.
  • “At the end of 1925, the price of an ounce of silver was $ 0.68. At the end of 2020, an ounce of silver sold for $ 17.14. During this 95-year period, the precious metal returned 3.46% per year.

This return is not particularly impressive, especially in light of inflation, which Johnson said was 2.9% over the same 95-year period. So much of this small return is further reduced by rising prices, leaving investors with low purchasing power growth.

However, gold obviously has better results over time, leaving silver in second place.

Gold is often advertised as a hedge of inflation, which helps protect investors from rising inflation. So when markets get rough, many investors turn to gold to weather the storm.

Gold is a safe haven, says Mahesh Agrawal, assistant director of specialized solutions at Acuity Knowledge Partners, a business intelligence provider. “High inflation creates market uncertainty and brings more investment in gold to protect the value of money,” he said. But he noted that “the marriage between gold and inflation can sometimes fall apart in the short term, as interest rates respond to higher inflation, diverting investment to the debt market.”

The link between silver and inflation is also high, says Agraval, but not as strong as gold.

“Silver has natural characteristics that keep its value relatively stable against the background of inflation uncertainty,” he said. “During high inflation, industrial demand for silver is declining, largely offset by strong demand from the investment segment. When inflation is low, the situation is reversed. “

Demand for gold and silver comes from a variety of sources, with gold being primarily an investment asset and silver being industrial.

Gold is commonly used as a store of value and has relatively limited industrial applications, says Agraval. “Investment and related sectors account for nearly 90% of total yellow metal demand in 2021, and only 10% was spent on industrial activities,” he said.

So the price of gold moves as investors assess their own investment needs, how much they want security and expectations of returns on other asset classes, such as stocks and bonds.

The relatively high price of gold per ounce makes it easier for investors to store value compared to silver, which makes it cheaper to store an equivalent amount in dollar value.

As for silver, demand is fueled more by industrial applications, such as electronics and solar cells, so during periods of economic stability and overall growth, it is doing better.

“For investment, silver mainly attracts smaller and retail investors, as it is more affordable and is perceived as offering a higher value given its lower price compared to gold,” said Agraval.

Silver tends to be more stable, in part because it tends to grow with economic growth, while also being a safe haven in difficult times, Agraval said.

But in shorter periods, the price of silver can fluctuate quite a bit.

“Silver can be highly volatile in the short term due to relatively low liquidity, especially in the financial market,” said Agraval. “The changeable nature makes silver a riskier stake than gold, and investors must choose the asset class that best meets the risk management requirements of their portfolio.

So based on your specific situation, you may decide to choose silver or gold, taking into account the respective features of each and the economic climate when making a decision. But the post-inflation return on buying and holding is not as impressive.

But investors have an alternative with a very attractive return: stocks with large capitalization. Johnson compared the purchase of an ounce of gold for $ 20.63 in 1925 to the same amount invested in a diversified portfolio of large companies as the Standard & Poor’s 500 index.

“The same $ 20.63 invested in gold at the end of 1925 would have risen to $ 225,788 if invested in the S&P 500,” Johnson said of a combined annual return of 10.3 percent.

In other words, investors would have about 119 times more money by investing in a diversified portfolio of large stocks than by investing in gold. The discrepancy was even worse with the silver.

Investors who are considering investing in gold or silver must then carefully consider whether this really makes sense to them. It may make sense in the short term or when there are specific imbalances in the relevant precious metals markets.

But in the long run, the answer to the question “Is it better to go with gold or silver?” May be “stocks.”

Both silver and gold can function as safe haven assets, but gold tends to have a better experience over long periods of time. However, for shorter periods, the specific dynamics of each market is ultimately more important for their respective returns. No matter what you buy, keep in mind that none of the assets generate cash flow, so investors may be best served in the long run to take a buy-and-hold approach with a portfolio of profitable and rising stocks.

Editorial disclaimer: All investors are advised to conduct their own independent study of investment strategies before making an investment decision. In addition, investors are advised that the efficiency of the investment product in the past is not a guarantee of future price appreciation.

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