Jeff Clark, Senior Precious Metals Analyst, GoldSilver
FEB 2, 2018
You’d like to buy some precious metals, but do you buy silver or gold? Is there really much difference between them other than the price?
Both are “precious” metals, meaning their occurrence in the earth’s crust is rare. But when it comes to investing in gold vs. silver, there are 5 important distinctions to be aware of. These differences can supercharge your portfolio—or make it a victim.
This article outlines the five differences to know about gold vs. silver, with special emphasis on investment implications…
The total supply of new silver each year is close to 1 billion ounces. Annual gold supply is around 120 million ounces.
This makes it seem like the silver market is 8 times bigger than gold. But just the opposite is true, because of the huge difference in their price. Silver’s lower price makes the value of annual supply much smaller than gold’s.
At current prices, annual gold supply is almost 9 times bigger than silver. Silver isn’t just smaller than gold. Look how it compares to the market cap of some popular stocks.
Each of these individual companies has a higher valuation than the entire annual supply of silver! Disney is 10 times bigger. Apple is 42 times bigger.
This explains why silver is more volatile than gold: it takes only a relatively small amount of money to have a greater impact on its price, more than gold or most any other asset class. As a result, silver will rise more than gold on up days, and fall more than gold on down days. Investors refer to these price changes as volatility. There are exceptions, of course, but that’s what happens most of the time. This leads to our first…
Investor Implication: You must be emotionally prepared for silver’s higher volatility.
It won’t do any good to buy the metal if you’ll panic and sell at the first big drop. In fact, as an investor, this volatility can be your friend. Historically, silver has fallen more than gold in bear markets, but risen more than gold in bull markets.
Here are some examples of how gold and silver performed during some of the biggest bull and bear markets in modern history:
GAIN from 1970 low to 1980 high
FALL from 1980 high to 1985 low
GAIN from 2008 low to 2011 high
FALL from 2011 high to 2016 low
You can easily see that on a percentage basis, silver rises much more than gold in bull markets, and falls much farther than gold in bear markets. So as an investor, if you buy during a bull market, history says silver will hand you a greater return than gold. Probably by a LOT. And if you believe, like me, precious metals are beginning a new bull market…
Investor Implication: Silver’s greater volatility means it will better perform than gold in the upcoming bull market.
The higher volatility also means that you’ll have to be more nimble when it comes time to sell. Silver will selloff faster and farther than gold, so when the bull market looks to be peaking, be sure to sell! If you’re comfortable with the higher volatility, and buy near the beginning of a bull market, purchasing silver is like adding an extra shot of espresso to your portfolio.
This seems like an obvious statement, but the reason it’s important is because silver has many similarities with gold…
If you buy physical silver—not ETFs, certificates or futures contracts, which are paper investments—you can capture the same benefits that gold offers. Advantages that virtually no other asset provides.
Like gold, physical silver…
• Is a hard asset. Of all the investments you own, how many can you hold in your hand? In a world of paper profits, digital trading, and currency creation, physical silver is a tangible asset that can’t be hacked (something your stock broker constantly guards against).
• Is money, just like gold. It can’t be created out of thin air (and thus depreciated) like paper currency or digital entries. Look through monetary history and you’ll find that silver has been used in coinage more often than gold.
• Has no counterparty risk. If you hold physical silver, you don’t need another party to make good on a contract or promise.
• Has never been defaulted on. If you own physical silver, you have no default risk. Not so for almost any other investment you make.
• Can be private and confidential. If you’d like some privacy or confidentiality with a portion of your investments, physical silver can provide it. But there is an IRS reporting requirement that could have tax implications when you sell silver (or gold) for a gain.
Silver’s advantage over gold is that you can capture all these same benefits but at a much lower cost. Your financial insurance just got more affordable. It’s why silver is called the “poor man’s gold.”
Investor Implication: Silver is much more affordable for the average investor, and will help maintain your standard of living as well as gold.
You can buy small denominations of gold coins and bars (from half ounce all the way down to one-twentieth of an ounce in some cases), but premiums spike for products less than one ounce. That’s because it costs the refiner just as much to produce a tenth ounce coin, for example, as a one ounce coin.
Maybe someday you don’t want to sell a full ounce of gold to meet a small financial need. Enter silver. If you want to buy a car or any other large purchase, you’d use your gold proceeds. But if you just want groceries or a new cell phone, you can sell some silver to cover the cost of those items at the time, without being forced to liquidate your gold. I think every investor should have some silver around for this very reason.
Investor Implication: Silver will be more practical than gold for everyday small purchases.
Last, silver’s greater affordability makes it more ideal for gifting. Want to give some precious metals as a gift? Silver just made it more affordable to do so.
So, silver is ideal for investors with small budgets, and also for any small financial needs that may come up in the future. Gold is better suited for larger purchases.
All those affordability advantages we just outlined come with a catch: it takes a LOT more space to store silver than gold.
At current prices, the same dollar investment will get you roughly 70 more ounces of silver than gold. On top of that, most silver is a lot less dense than gold—pure silver is 84% larger in volume than pure gold. Add those two facts together and it means that silver takes up as much as 128 times more space than gold for the same dollar value!
Here are some practical examples of that difference. At current prices…
• You can hold $50,000 worth of gold in one hand—but it would take about 10 large shoe boxes to hold the same dollar amount of silver.
• $50,000 worth of gold weighs about 2.6 pounds—but the same value of silver weighs about 189 pounds!
• You can store roughly $170,000 of gold in a small safe deposit box, but that same space will only hold about $2,300 of silver.
It’s relatively easy to hide some gold coins in a sock drawer or cookie jar, but those same hiding places are impractical for the same investment in silver. Whether you buy coins or bars, you’ll need a lot more space to store silver than gold.
And because it requires more space, the fees for professional storage are usually a little higher. (The difference in rates isn’t unreasonable, though: for amounts up to $100,000, for example, GoldSilver charges 0.385% for gold per month, and 0.485% for silver.)
This difference applies to transporting physical silver as well: it may be more difficult, expensive, and cumbersome.
Last, silver will eventually tarnish; pure gold does not. So silver coins and bars must be stored in a dry place with no exposure to the elements, a concern you don’t have with gold.
Investor Implication: Gold takes up much less storage space than silver, is cheaper to store, is lighter and less cumbersome to transport, and doesn’t tarnish. It takes a little more strategizing on your part to store silver than gold. But there are definitely ways to store silver at home as this article shows.
About 12% of gold supply goes to industrial uses. But due to silver’s unique characteristics, a whopping 56% of its supply is used in industry. Silver has so many applications that believe it or not, you don’t go one day without using a product that contains it. From electronics and medical applications, to batteries and solar panels, silver is everywhere, whether you see it or not. As Mike Maloney says in his book, “Of all the elements, silver is the indispensable metal. It is the most electronically conductive, thermally conductive, and reflective. Modern life, as we know it, would not exist without silver.”
Why is this important? Because the state of the global economy can have a greater impact on silver demand than gold. Silver is thus more susceptible to economic booms and busts.
Investor Implication: Demand for industrial uses of silver is high in a strong economy, and weaker in a recession or deflation. But that’s only part of the story… unlike gold, most industrial silver is consumed and then thrown away (and in some cases destroyed during the fabrication process). It’s just not economic to recover every tiny flake or grain of silver from most products. As a result, when the product gets discarded, that silver is gone for good. This limits the amount of silver that can return to the market through recycling.
Investor Implication: Unlike gold, millions of ounces of silver are lost every year. New supply must keep up in order to meet demand. But won’t the silver price fall in a recession or any serious economic slowdown?
Fair question. Let’s take a quick look at a one of the worst economic periods in modern history and see what happened…
It’s hard to imagine a worse economic environment than the 1970s, especially the second half of that decade: two recessions, a 14% inflation rate, high unemployment, an energy crisis, the Russian invasion of Afghanistan, and ongoing cold war tensions. As for silver itself, industrial demand fell, and global supply rose. Does this sound like an environment where the silver price would rise?
Not at all. But it did:
The reason the silver price rose so much was actually because of those issues. Investors bought silver to help shield their portfolios from all the turmoil at the time. And on top of it they earned a stunning return on their investment. Investor Implication: During a monetary or financial crisis, silver’s role as money has historically had more impact on its price than its role in industry. The one economic situation where silver may not do well, at least initially, is a deflationary depression. Something like the Great Depression. However, keep in mind that in dire circumstances such as that, governments and central bankers are likely to institute highly inflationary policies to keep the economy afloat—the very policies that would serve as a launching pad for silver due to its safe haven status.
This difference may not seem to have immediate importance to an investor, but it’s a behind-the-scenes development that could potentially have big consequences in certain circumstances. Governments and other institutions used to hold large inventories of silver. Today, however, most of them no longer have stockpiles of the metal. In fact, the only countries that warehouse silver are the US, India, and Mexico.
Look what’s happened to those inventories since 1996.
The primary reason governments don’t hold a lot of silver is because it’s no longer used in coinage. But as we outlined above, silver is used in industry to a much greater degree now… so if future industrial needs rise, or the supply chain were interrupted, governments will be ill-equipped to support those needs.
In contrast, central banks hold almost 30,000 tonnes (96.4 million ounces) of gold in official Reserves. And on a net basis, they continue buying every year. These ongoing purchases contribute to the overall demand for the metal. While this source of demand for gold isn’t present for silver, it does put the silver market in a precarious position. If the need for physical silver were to suddenly increase—a monetary crisis, a shortage in industrial supply, a spike in investment demand—governments won’t be able to meet these needs with such tiny stockpiles.
This scenario would have a great impact on the silver market—demand would spike, and the price would skyrocket. This scenario may or may not play out, but it’s a delicate position that could have a deep and immediate impact on the silver market.
We consider both gold and silver to be wise long-term investments. Both have stood the test of time as a reliable store of value over the past 5,000 years. No other investment can boast a similar track record.
Gold and silver share many of the same characteristics. They are:
However, each offers some distinct advantages over the other.
Less volatile than silver. Will fall less than silver in bear markets and rise less than silver in bull markets.
More volatile than gold. Will fall more than gold in bear markets and rise more in bull markets. Selling after big run-ups will be critical to investment success.
One ounce costs 70 times more than one ounce of silver (at current prices). Can buy smaller denominations than one ounce but premiums are higher.
More affordable than gold, with similar benefits. Enables seller to meet small financial needs in the future. Cheaper for gift-giving.
Takes up less space than silver, is cheaper to store, and doesn’t tarnish.
Requires up to 128 times more storage space than gold, is more expensive to store, and will tarnish over time.
Only 12% of demand, and has little impact on price. A poor economy typically pushes investors into gold.
Comprises 56% of total supply. Health of economy can impact demand. Most industrial silver cannot be recovered.
Central banks buy and hold a lot of gold.
Governments have only a very small stockpile of silver.