Gold vs Silver: what to buy?
Investing in precious metals is a big commitment, and it can be difficult to know which one to choose. Both gold and silver have their own benefits and drawbacks.
Why invest in gold?
VAT Free
Unlike silver or platinum, gold bullion investment is exempt of VAT. This is especially useful when it comes to selling. You would need the silver price to increase by 20% in order to make a return on investment. In the contrary, gold is potentially more profitable because it is VAT Free.
Storage
Gold is a convenient precious metal to store. You can store larger amounts in value in a smaller quantity of metal. In fact, gold as a metal is denser than silver. Therefore, this will take up less space, and will be safer and more discrete to store. To illustrate, a kilo gold bar is worth around £30,000. A silver investment of similar value would consist of around 13 x 5kg silver bars, or an even larger quantity of smaller denomination bars.
Not influenced by Industrial Demand
Gold and Silver prices are immune to the performance in the stock markets. Although silver tends to follow the same trends as gold, the silver price depend more on its industrial demand than gold. Therefore, it's price is much more volatile. In the contrary, gold is a much more predictable investment. Therefore, it makes sense to opt for the precious metal that is the most independent. Holding gold is the best way to maintain the value of your portfolio during times of economic uncertainty.
Better Purchasing Power
Gold is a much safer asset for long-term investment. It maintains a very high value overtime, even when its price falls. If we analyse the evolution of the gold and silver prices since 2011, we can see that gold's price dropped less than silver (around -23 % over 5 years, compared to -59% for silver). In fact, gold price remains much more stable during inflationary times. This is because of its limited global supply.
Why invest in Silver?
More Affordable
Silver offer all the benefit of gold but at a much lower cost. This is why silver is called the “poor man’s gold”. it is ideal for investors with small budget. In the contrary, gold is better suited for larger purchases. Moreover, silver’s greater affordability makes it ideal as a gift.
Higher volatility
The silver's price is more volatile compared to gold. Its price rises much more than gold in bull markets, and falls much farther in bear markets. Therefore, silver can potentially perform better than gold, and give you greater return on investment. This also means that you would have to be more reactive when the time comes to sell. If you’re comfortable with the higher volatility, and buy near the beginning of a bull market, purchasing silver can boost your portfolio's returns on investment.
Selling Benefits
Maybe someday, you don’t want to sell a full ounce of gold to meet a small financial need. With silver, you can sell some of your silver coins to cover small costs at the time, without being forced to liquidate your gold. Silver will be more practical than gold for everyday small purchases. We believe any precious metal investor should have some silver added to his portfolio for this reason.
More Industrial uses
The silver demand is relatively high for a precious metal with a limited supply. Around 56 % of the silver goes to industrial uses (compared to 12 % for gold). These inlude electronics in mobile phones chip boards, DVD, medical sector, batteries, solar panels... The silver demand is high in a strong economy, and weaker during periods of recession or deflation. Therefore, Silver is more susceptible to economic booms and busts. The state of the global economy can have a greater impact on the silver demand than gold.
The Gold / Silver ratio
It is common knowledge that gold is much more expensive than silver. However, the difference of price between gold and silver is not fixed. To measure that, you can use the gold-silver ratio.
The gold-silver ratio is the proportional relationship between the respective value of gold and silver.
Or in other words, it represents "how many ounces of silver can be bought with one ounce of gold".
Therefore, the gold / silver ratio changes regularly as both metals prices fluctuate in realtime.
The theory says the following (although this is not guaranteed):
- The ratio will usually rise during a bear market: Gold will become more valuable against silver.
- The ratio will fall during a bull market: Gold will become less valuable against silver
The period 2011-2016 is a good example to illustrate the evolution of the gold-silver ratio.
- In 2011, the price of both gold and silver peaked. As a result, the ratio doubled. At this period: 1 oz of gold = around 31 oz of silver.
- In 2016, the silver price dropped, loosing nearly 2/3rd of its 2011 value. The ratio reached around 80:1. At this period: 1 oz gold = 80 oz of silver
It is estimated that there is approximately 16 times more silver in the world than gold, meaning that the natural ratio should be around 16:1. The fact that the current ratio is so far off this figure could be taken as a sign that the white metal is currently severely underrated, indicating a potentially excellent investment opportunity. As explained before, silver has many more industrial uses than gold. Therefore, its price tends to fluctuate much more. This is why silver is also considered a great safe-haven asset.
Ideally, an investor would include both gold and silver in its bullion portfolio, covering them for all eventualities and benefit from both metal's fluctuations. However, the gold-silver ratio should therefore not be used to determine outright which of the two precious metals is a better investment asset. Rather, the ratio can be used to answer the question of when is the best time to choose one metal instead of the other.
Premium Comparison
In general, if you are spending any amount up to $1,500, silver is going to have a lesser mark-up than gold. At present retail prices, $1,500 would buy you just over 40 ounces of silver. At that quantity, most companies will charge a premium of about $2.25 per ounce. With silver currently sitting at about $33.50/ounce, a $2.25 premium per ounce represents a 6.7% premium over spot.
Now, let’s compare that to buying $1,500 of gold. Since 1oz of gold currently carries a retail price of about $1,785, you would have to buy gold in either grams or partial ounces, both of which carry a higher premium per ounce. At retail prices, $1,500 would buy you about 23 grams of gold. That amount of gold, based on spot price, is worth only $1,400, meaning you would be paying a 7.15% premium over spot.
For most retailers, $1,500 is about the break price for gold/silver percentage mark-ups. Once you get higher than $1,500, you usually will pay a lesser mark-up for gold products. Let’s look at another example to prove this point.
Imagine you were spending $15,000 on either gold or silver – whichever had the least markup. At retail prices, $15,000 would buy you about 425 ounces of silver with a spot value of $14,216, meaning you pay a 5.5% premium over spot. At retail prices, $15,000 would buy you about 8.4 ounces of gold (the .4 ounces was spent on 11 one-gram bars) with a spot value of $14,500, meaning you pay a 3.5% premium over spot.
Based strictly on spot price premium, investors who will be putting less than $1,500 into precious metals are better off buying silver, while investors who will be putting more than $1,500 into precious metals are better off buying gold. Of course, this does not take into account personal preference or an investor’s feelings on the future outlooks for both gold and silver.