Gold or Silver—Which is Better for the Investor?

gold-bars

Precious metal investments skyrocketed following the 2008 recession. Less than a decade later, there’s still a high demand for precious metal investments. Gold and silver hedges against economic downturns, so it’s natural that when the dollar is devalued, people would seek to invest more in precious metals.

Now, the big question is, which is more lucrative: gold or silver? Gold has centuries old association with wealth while silver is considered the “poor man’s gold.” As amusing as popular perceptions might be, they do not necessarily affect the business of investment. In the past several years, both gold and silver prices have gone up. If you are a savvy investor who wants only the most lucrative returns, you might be pondering about the question mentioned above. Now, before giving a definitive answer, let’s look at some facts first.

Gold Has Always Been More Popular

If there ever was a popularity contest between gold and silver, gold would win, hands down. Gold is the preferred metal by many central banks, especially in Asia and Russia. China, a country that holds trillions of U.S. dollars worth of government bonds, loves to trade in the dollar risk for gold risk. Central banks do not hold the same affinity for silver.

Historical Ratios Favor Gold

In the past, 1 oz of gold went for 15 to 22 silver coins or 1 oz bars. Historically speaking, gold has held more relative value. In the past century or so, the gold to silver ratio has fluctuated dizzyingly but has buffeted around 96. Currently, the gold-silver ratio is 51. There are investors who believe that popular and highly significant commodities like gold and silver, no matter how much they fluctuate, always return to the historical norm. If this is actually true, gold will always have more value over silver.

Silver Has More Demand

Gold is not used for much except as jewelry. Silver, on the other hand, has a widespread industrial use. Silver is in currency, and thanks to its low resistivity, is in a wide variety of electronic gadgets and appliances as well. If it’s the consumer demand that drives up a value of a commodity, then silver certainly has the advantage here.

Silver is Mined More

Because there’s high industrial demand, silver is mined more. In 2012, 24,000 tons of silver was mined, while only 2,700 tons of gold was mined. This should eschew the gold-silver ratio, with gold being valued more. However, there’s another important factor to consider: silver is scarcer than gold.  Most of the mined silver is quickly put to industrial use, so there’s less in circulation. Though gold is mined less, there’s more in circulation thanks to the lack of practical use. Also, silver mines are becoming depleted. Silver is often mixed with other metals, and the amount produced each year seems to be slightly decreasing. So, silver could gain more value due to scarcity in the future.

The Verdict

It’s difficult to provide a definitive answer. Gold has always been valued more, and the historical pattern is likely to continue. However, there are instances when silver performs better than gold. For example, from November 2008 to May 2011, silver outperformed gold in the market. However, such periods are brief.

Silver is easy to handle precious metal for small time investors. Newcomers can invest in silver via exchange-traded funds and mining companies without actually having to own the metal, unlike gold. Gold is difficult to hold onto. Theft is a risk and governments can suddenly confiscate or restrict trading of gold, such when the U.S. government made it illegal to own gold in 1934.

A good investor should consider all these facts and risks when it comes to choosing a precious metal to invest in. Gold is recommended for big time investments while silver may be the better choice for small investments.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing