Investing in Gold vs Silver
Gold and silver are long-term investments. These precious metals can be held in a portfolio or individual retirement account (IRA) to allow for wealth preservation. They have proven to be sound investment options that have provided stability for investors during times when the stock market underperformed.
Precious metals like gold and silver are financial instruments that have stood the test of time. To this day they are assets that protect the value of a retirement portfolio, one of the key investing objectives. This guide will show you how to invest in gold and silver.
Gold and silver bullion bars
The global economy continues to manage the lingering effects of COVID-19, along with its new variants, carrying on the uncertainty that the economy and markets continue to face. This backdrop signals greater demand for precious metals. Investors should not discount the changing market conditions and economic environment in 2022.
History of Precious Metals Performance
When U.S. President Richard Nixon took the United States off of the gold standard on Aug. 15, 1971, the precious metal was hovering roughly around the $40 per oz mark. Following this period, gold gradually grew past $650 by 1980. It then began a stretch where the price traded roughly between $280 to $430 from May 1981 through August 2005. The gold market broke out to $1,000 per troy ounce in March 2008 and reached an all time high of $2,000 in August 2020.
Chart of gold prices over a 50 year time frame
Taking a long-term view, throughout the past 20 years, gold has returned more than 540%. This is similar to its past performance during the bull markets of the 1970s. During this last year, gold fell roughly 3%.
Silver tends to follow the performance of its less volatile cousin gold. Over the past 20 years silver has returned roughly 365% but like its precious metal counterpart, silver has underperformed this past year, down roughly 12%. Silver performance tends to follow gold, especially over the last 100 years.
Chart of silver prices over the past 5 years
One factor that has influenced the performance of these precious metals may have been the quantitative easing measures taken by global monetary authorities to manage the consequences of the pandemic. The Federal Reserve in the U.S. along with central banks around the world purchased assets like bonds in order to stimulate the economy and markets. Since then, high volumes of money are circulating in the economy, which encourages investment in high-risk assets. Because precious metals are assets that help reduce volatility and can therefore be considered lower risk assets, they may not have been in the best economic environment to outperform.
Outflows of physically-backed gold ETFs were about $9 billion in 2021 but are still higher than pre-pandemic levels, according to the World Gold Council.
A similar trend was seen in silver ETFs. A glimpse at the silver market shows the iShares Silver Trust (SLV) an $89 million outflow or a 0.7% decrease in the final week of December 2021 alone, according to a report by Nasdaq.
Today, market participants are facing several market and global economic challenges including:
- anticipating changes from the Federal Reserve
- persistent inflation
- geopolitical tensions
Among many other factors, these are scenarios in which gold and silver thrive.
4 Reasons to Invest in Gold
Either gold or silver can be held as tangible assets
1. Gold is a store of value
Gold is what’s known as a store of value, or an asset that holds its wealth over time. This has been true since the time of the Roman Empire and earlier. Like all assets, gold’s price fluctuates. But the precious metal has been able to sustain its purchasing power without depreciating, which means it has maintained its value over periods of favorable and poor economic conditions.
2. Gold is a liquid asset
A favorable characteristic of gold is its liquidity. An asset’s liquidity refers to the ability for it to be converted into cash without losing value during the conversion. Furthermore, gold is liquid because there is a global market of buyers, so it can be bought and sold with ease. However, there may be a cost (in terms of time) associated with waiting for physical delivery of your metal.
3. Gold is an accessible investment
Another reason to consider allocating toward gold is its accessibility. Initially, those new to investing may think that gold is an asset that’s exclusive to wealthy investors but that couldn’t be further from the truth. Any investor interested in purchasing physical gold can do so by finding a reputable gold retailer that sells gold bullion or collectible coins. However, it’s important to consider the additional costs associated with maintaining physical gold, including storage fees and insurance.
4. Gold is a safe haven asset
Gold is a historically proven safe-haven investment. This means, over periods of economic uncertainty or bouts of market volatility investors can rely on gold to act as a portfolio stabilizer since it's an uncorrelated asset to other conventional assets in an investment portfolio like stocks and bonds.
For the same reason, gold is a portfolio diversifier. Gold is an uncorrelated asset to traditional asset classes like stock and bonds. This means that when stocks perform poorly, gold acts as a portfolio stabilizer. This makes it an ideal safe investment during a stock market downturn
Gold is an inflation hedge
The reason to invest in gold is not because it’s an asset that outperforms and provides outsized returns. Rather, gold is considered an inflation hedge or an asset that offers investors wealth preservation. Over time, the value of fiat currencies wither away due to inflation. As a result, the U.S. dollar and other fiat currencies depreciate in value over time. In order to reduce or eliminate the risk of inflation, investors allocate toward gold to maintain their money’s purchasing power. This is what makes gold such an important asset, especially in times of crisis.
Why Invest in Silver?
Many of the reasons to invest in silver or to buy silver bullion mirror the reasons for investing in gold.
Silver is a hedge against inflation.
The precious metal is a stable commodity to hold in a portfolio during times of economic or political distress.
Silver is considered an uncorrelated asset and it adds to diversification.
Given the overlap in similarities for both precious metals, there is room to hold both gold. and silver in an investment portfolio.
6 Differences Between Gold vs Silver as an Investment
Comparing an American Gold Eagle coin and an American Silver Eagle coin
1. Gold is more expensive than silver
First and foremost, there is a big difference in the price ratio of silver compared to the price of gold. Currently, the spot price of silver is roughly $22 per ounce. The spot price for gold is roughly $1,800 per ounce. Comparing the two precious metals, it can be argued that silver is undervalued compared to gold.
Given that silver is less expensive than gold, this can be seen as silver being more accessible than the yellow metal. It is often called "poor man's gold" for this reason. Investors concerned about cost may want to start by purchasing silver.
2. Gold is more rare than silver
What makes gold more valuable than silver and why is silver so cheap? It comes down to limited supply and rising demand. The total supply of silver each year is more than gold. Since gold is more of a rare and scarce precious metal compared to silver, along with having high demand, its value increases. All these characteristics are reflected in gold’s current price.
3. Silver’s price is more volatile than gold
Another key difference between the two precious metals is the price of silver tends to be more volatile than that of gold. This has borne out over most of the last 50 years. The market for silver compared to gold is much smaller, which makes it inclined to experience more price fluctuations. This may not be a concern if you are a day trader who is looking to capitalize on price swings, but for a long-term investor seeking a portfolio stabilizer, it can pose a potential risk.
4. Gold can be a better diversifier than silver
Gold tends to be the better precious metal to diversify your portfolio with instead of silver. While both silver and gold are uncorrelated assets to other securities, gold has even less correlation to the stock market than silver. But if someone already owns a good deal of gold, a silver investment may be the better option for diversification purposes.
5. Gold helps manage currency risk better than silver
Central banks are one of the top entities that hold the largest amount of gold in their reserves and are frequent buyers of the precious metal. Central banks around the world hold gold for similar reasons investors hold it and that’s because it’s a hedge against inflation. Since gold is not tied to the dollar or other fiat currencies, it also helps central banks manage currency risk, which can be a problem if a currency fluctuates too much. Gold manages the risk of a declining currency because it has intrinsic value whereas fiat currency does not.
6. Silver has many important industrial uses
Central banks and investors around the world see one of gold’s main uses as a store of value. While silver is also seen as an investment with important hedging properties, it’s also an industrial-based metal, which is why it’s considered a hybrid metal that’s known for its investment and industrial uses. Silver has high conductivity, the highest of any metal, making it perfect for electronics and solar panels. It is also used in electric vehicles (EVs).
3 Ways to Invest in Gold and Silver
1. Physical precious metals
Physical bullion includes bars, rounds, and bullion coins. Coins will always have a higher premium, but they are also legal tender currency.
The great thing about investing in physical gold is that you retain full ownership of the asset. Unlike a stock or an exchange-traded fund where investors gain exposure to companies that manage gold in some fashion, owning the commodities means they are fully yours without a middleman. The way to buy gold is by finding a licensed precious metals dealer, selecting the gold coins and silver coins or bars that fit your investing needs. Then decide if you prefer to store your gold and silver at home or pay a small fee for storage space at a third-party facility. (The latter is required for a gold IRA.)
2. Mining stocks
One of the more convenient ways to invest in precious metals is through gold stocks or silver stocks. Investors can buy shares of publicly-traded gold mining companies, companies that produce or mine gold and companies involved in any sort of operations related to the management of the precious metal. Some of these companies include Barrick Gold (GOLD), New Gold Inc. (NGD), and Franco-Nevada Corp (FNV), to name a few.
3. Exchange-traded funds
Another way to invest in gold and silver without actually holding them in physical form is through ETFs. These financial instruments can be bought and sold on major exchanges and can be accessed through your brokerage account. These investments are liquid because investors can easily buy and sell shares of precious metal ETFs, much like exchange-traded funds that track the S&P 500 (SPY). They are also often held by mutual funds.
Keep in mind that gold ETFs come with an expense ratio, which is a management fee. These fees tend to be much lower than owning physical gold or silver. Some gold and silver ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), Aberdeen Standard Physical Silver Shares (SIVR), and iShares Silver Trust (SLV).
Investors need to know the gold/silver ratio when they buy precious metals.
Moving into 2022 and Beyond
The stock market has been running up at all-time highs throughout the past couple years. However, as history suggests, this run has a limit, and what goes up must eventually come down. When there is a market decline or even a correction, investors should be prepared; and one way to do this is diversifying an investment portfolio with precious metals like gold and silver that are able to withstand rampant market volatility.
Taking a look at the historical price of silver, it can be seen that its price has been low. This may be an interest for value investors looking into buying into the precious metal before the price breaks out. There is optimism around the price performance of silver in 2022 with some analysts estimating that silver may outperform gold this year.
One very important determining factor for the performance of both gold and silver in the year ahead is the level of inflation. Rising prices of goods has been top of mind for investors and if inflation persists, this will drive demand for precious metals and thereby increase their market value.
Another factor for precious metals investing is the Federal Reserve’s monetary policy. The Fed has started to scale back its asset purchases and is expected to reduce its bond balance sheet followed by a hike in interest rates. Gold does not pay dividends like stocks. It is an asset that helps preserve wealth. So, when interest rates rise, gold may be less attractive to buy up since it costs to manage the asset.
As a hybrid asset, silver has a strong presence in the industrial arena. However, there has been a slowdown of industrial activity as a result of COVID-19. Coupled with an oversupply of silver, the short-term prospects for silver are balanced. However, a catalyst for the precious metal is industrial demand from the solar and the automotive sectors, which can boost the price of silver in 2022.
Written by Paulina Likos
The information in this article is intended for educational purposes only. It is not intended as financial advice. Consult a wealth management professional before making any investment decision.
Read more precious metals guides from the expert authors at Gainesville Coins:
Gold vs. Cash: Comparing the Pros and Cons
Beginner's Guide to Investing in Precious Metals
Gold and Silver Futures Contracts 101
Silver Coins vs. Silver Bars: Which Is a Better Investment?
Is Silver a Good Investment in 2022?