Gold vs. Silver Investment: Which Shines Brighter

Which is the Winning Metal in the Gold vs. Silver Investment Standoff!

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By Alice Walker
Investor Relations Manager at Bullion.Directory

Investing in precious metals has a long tradition among the financially savvy. Precious metals have a key place in the diverse portfolios of my clients, ranging from ambitious entrepreneurs to cautious retirees looking to protect their nest egg.

And everyone eventually asks – which is better, gold vs. silver investment?

Gold of course tends to wear the crown, get all the movie airtime and is a pop-culture synonym for wealth. But would it surprise you if you found out many of the bullion dealers I work with sell 70% more silver than gold?

The same goes for gold IRA accounts. Despite gold quite literally being in the name, a sizeable majority of these are actually heavier on silver than on gold.

So, given the choice of a gold vs. silver investment, on which side of the argument would I fall? And what would you do?

Each metal has its strengths and weaknesses, and understanding these can make the difference between an investment win or loss, or as I prefer, a bigger win or a smaller win.

Gold Investments: An Enduring Love Affair

Gold has a reputation for being the undisputed king of precious metals, offering stability and consistent growth. It is the steady, reliable, and more predictable brother in the precious metals family.

Historical Performance

Gold has been revered and coveted since the dawn of civilization. From the gold standard that once formed the backbone of global economies to the gold rushes that created millionaires overnight, this metal has had an enduring effect on the psyche of humankind.

Its historical performance too reveals a gradual, long-term appreciation that’s impressive. It has seen an average 9% annual gain since 1971 and I can see no reason why it won’t continue to act as a store of value for aeons to come.

Unless the very concept of money stops being a thing. Which given human nature, I doubt.

Liquidity

One of the most significant advantages of gold is its liquidity. Regardless of where you are in the world, you can swiftly convert gold into cash.

As I’ve mentioned previously I’ve had clients who were able to sell their gold for cash when they found themselves in a financial bind during international travel. That’s a testament to the universal acceptance and value of gold.

But even when you’re not in a bind, any local coin shop or bullion dealer is going to give you at least the current market price for gold, and probably a premium too for popular coins and bars.

Larger dealers also offer buy-back programs where they’ll give a fairer than market price for gold they’ve previously sold – especially if it’s been stored in their vault since.

Role during Economic Crises

Gold takes center stage during economic crises. During tumultuous times, such as the Great Recession of 2008 or the recent COVID-19 pandemic, gold has consistently proven to be a sanctuary for investors.

It offers a safety net, a buoy in stormy economic seas. My clients who held onto their gold investments during these times had peace of mind knowing their wealth was secure, thanks to gold’s inverse correlation with stocks during financial turmoil.

Silver Investments: The Underrated Warrior

Silver gets a bad rep, and being commonly known as ‘the devil’s metal’ it’s not exactly popular with some good christian folks.

This apart, silver tends to be seen as gold’s less glamorous cousin – it’s cheaper, it tarnishes and takes up a lot more space than gold of an equivalent value.

Despite all of this it more than holds its own in the investment world, sometimes offering surprising benefits that gold does not.

Volatility and Potential Returns

Silver has a reputation for being more volatile than gold, and rightly so. While this volatility may seem risky, remember the old adage – “with greater risk comes greater reward.”

The silver market’s fluctuations can lead to impressive returns, especially for those willing to invest time in understanding its patterns – which brings me onto the gold:silver ratio, something I’ll cover in depth later in this article.

Industrial Demand

Unlike gold’s bit-part, silver has extensive uses in numerous industries, such as electronics, solar energy, and medical applications.

This consistent industrial demand and the fact that in many of these industrial applications the silver is either used up chemically, or it is not reclaimed due to high reclamation costs vs silver’s current price – both keep silver prices buoyant, but also surprisingly make above-ground supplies of silver increasingly scarce.

Industrial pressures on silver will continue to grow due to just how much silver is used in many green technologies – an industry that is not going away any time soon!

Affordability

Affordability is regularly given as the reason people buy silver over gold – although in truth if you’re spending $10,000 on silver vs. gold, you’re still spending the exact same amount – you just get a smaller chunk of gold.

Silver’s lower price point per ounce is a boon for budding investors fixated on size (because bigger is better?)

It allows you to dip your toe into the precious metals market and buy a weighty piece of metal without needing a hefty bankroll. But the flip side of that is – $50,000 worth of silver is going to take up a significant amount of space and of course there are the weight issues.

Meanwhile $50k of gold can easily fit in your coat pocket.

Comparing Gold and Silver Investments

Having talked about some of the unique attributes of both gold and silver, let’s now compare these two precious metals in the context of various economic scenarios.

Inflation

Both gold and silver serve as an effective hedge against inflation. However, gold often outperforms silver in this respect due to its more stable value. My clients mix gold and silver in their portfolios as a two-pronged approach to tackle inflation while at the same time take advantage of any additional upside in silver for greater profits.

Economic Downturns

During economic downturns, gold does tend to outperform silver. Gold’s steady reliability, hedging appeal and universal value make it a safer bet during uncertain times. On the other hand, silver, with its priced-in industrial demand, can suffer during such periods due to decreased manufacturing activity – at least in the initial stages of a downturn.

Economic Booms

During periods of economic growth, silver often experiences higher percentage gains due to increased industrial demand. However, these periods might see gold’s value stagnate or even decrease as investors move towards more risky investments.

(Sidenote: It’s important not to confuse a true boom with a manufactured boom. Booms with little basis in the underlying numbers can result from governmental meddling in markets and flooding them with freshly-printed money. In these cases, gold is very much your friend for what is to come…)

Tax

They may both be precious metals, but in a great many jurisdictions they are not taxed the same. As an example, in the UK investment gold has a zero rate of value added tax (VAT is supposedly a tax on luxuries) whereas investment silver sees a whopping 20% added to the purchase cost, making gold a far better option. The supposedly affordable option is 20% more expensive than it need be.

Understanding the Gold-to-Silver Ratio

The gold-to-silver ratio represents the amount of silver it takes to purchase one ounce of gold. This ratio can guide investors on when it’s favorable to buy silver or gold.

When the ratio is high, it suggests that silver is undervalued compared to gold. Conversely, a low ratio indicates that gold might be undervalued compared to silver. By understanding these fluctuations, investors can strategically buy and sell these metals to maximize their profits.

Moving back and forth between gold and silver is a tactic a great many precious metals investors do to increase their overall pot of metals without the need to inject more capital.

For instance, let’s say the gold-to-silver ratio is 75:1. This means you would need 75 ounces of silver to buy one ounce of gold. Now, if this ratio widens to 100:1, it implies that silver has become even cheaper compared to gold.

Using the Ratio to Your Advantage

An investor who wants to capitalize on these changes could use a straightforward strategy. When the ratio is high (silver is undervalued), they could buy silver.

Then, if the ratio shrinks indicating silver’s value has increased relative to gold, they could sell their silver and buy gold instead. This way, they’ve effectively bought gold at a ‘discounted’ price using silver.

However, it’s crucial to note that like all economic indicators, the gold-to-silver ratio shouldn’t be used in isolation. It’s only one tool in an investor’s toolbox.

To illustrate the point – I have a colleague who is a seasoned investor with a deep interest in market trends and indicators. She watches the gold-to-silver ratio diligently. When the ratio was historically high at around 100:1, she decided to invest a substantial portion of her portfolio into silver, due to it being undervalued.

Over the next couple of years, as the global economy went through multiple changes, the ratio dropped to around 70:1. Seeing this as a favorable situation, she then sold a portion of her silver holdings and used the proceeds to buy gold. (She also came in and out of bitcoin with her gold and silver but I digress!) Today, her portfolio boasts a healthy mix of both gold and silver, with gains that have exceeded both her expectations and the market.

A Word of Caution

While the gold-to-silver ratio can be an effective tool, it does require patience and a thorough understanding of the precious metals market. It also comes with its own set of risks, as the ratio can sometimes stay high or low for prolonged periods leaving your position stuck – leading to the risk of opportunity loss.

Choosing the Right Fit for Your Portfolio

While both gold and silver have their place in an investment portfolio, the choice ultimately boils down to your investment goals, risk tolerance, local taxes and your financial situation.

If you seek stability and have a lower risk appetite, gold might be your best bet. If you’re willing to accept higher risk for potentially higher returns, then silver’s volatility could work in your favor.

Or as many prefer…

A Balanced Approach

The age-old debate of gold vs. silver doesn’t have to be a battle, but a balancing act.

Both these precious metals offer unique advantages and, when utilized effectively, can play a crucial role in fortifying your investment portfolio.

By playing with different mixes of gold to silver, investors can get the best of both worlds and finely tune their portfolio towards where their investment objectives lie.

Personally I love investment gold in my portfolio – but the collector in me is obsessed with vintage 1970s silver bars, covered in (exciting for me at least) ancient black patina. I’ll happily ignore my own advice and pay stupidly high premiums over spot for the right levels of silver ‘rust’. Go figure.

Happy investing!

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