The investing world has a relatively soft corner for precious metals. And why not? Every time the world spun itself into a new crisis, these limited resources acted as a safety net, especially gold.
In 1991, when India arguably faced its biggest economic crisis, the yellow metal bailed the country out of it. In 2008, when the Lehman crisis hit the world largely, again, these metals saved the financial systems from crumbling.
Today, as the world finds itself amidst an economic slowdown triggered by the outbreak of pandemic, we find ourselves circling back to precious metals. But between gold and silver, which is better? Here is what you need to know.
Historically, both silver and gold have been used as excellent hedging tools in the face of black swan events, market crashes, and currency depreciation. In fact, they are also considered an effective inflationary tool.
But like most assets, both these metals have their boom and bust cycles. Regardless of any time period, it is important to consider the following while thinking about investing in gold or silver.
Historically, silver has proven to be more volatile than gold. While its demand is extensive, the supply currently stands around a billion ounces as per statistics available in the media reports.
Besides, most of the demand is from industries. This means the demand for silver fluctuates depending on the company’s operations. And mostly cyclical in nature. So with a constant tug on the demand-supply rope, minute discrepancies impact silver prices largely.
It would surprise you that silver, which today trades at Rs 60,250 (27th September 2021) hit an all-time high of Rs 74,000 per kg in 2011 as per data available in the media reports. This goes on to speak volumes about the highly volatile nature of silver.
This can again make silver both a good profit-making commodity as well as a risky asset.
When we compare this with gold, we find that gold has maintained remarkable stability than silver has.
Liquidity measures the ease with which an asset can exchange hands without impacting the markets dramatically.
The gold and silver supply markets are valued at around 24.5 trillion and 4.4 trillion (data from various news reports) respectively, clearly depicting that gold enjoys almost 6x more liquidity than silver.
The mammoth demand for both these metals have ensured ample liquidity in the market.
But the yellow metal here is slightly a more liquid asset and enjoys an edge over silver, simply for the fact that demand is higher than any other precious metal.
Besides the jewellery industry, the scale at which both these metals are employed in various sectors is unbelievable.
Gold is an effective conductor, thereby immensely valuable to the conductor, electronics, and thermal industries. Not to mention, the extent to which gold is revered in India, especially during weddings and auspicious occasions.
Silver is extensively used in automobile, electronics, thermal, medicine, and other manufacturing industries. Nearly 60% of all silver mined is employed in industrial production. But due to the same reason, when an economy is down, silver takes an acute hit.
Storage becomes a unique issue when purchasing these metals mainly due to the vast price difference.
At the current price, $1 million worth of silver would require far more storage than gold of the same value. Moreover, silver is denser than gold, thus demanding more storage space.
Characteristically too, silver tarnishes more ferociously than gold, thereby requiring a dry and more expensive storage facility with climate-controlled features.
Naturally, silver is more affordable than gold. A mere half an ounce of gold can today purchase over 1 kg of silver. The gold to silver ratio currently stands at 120:1 – the highest in 5000 years, particularly since the outbreak of the pandemic.
Central government and banks have their own gold reserves. Governments hardly can pledge silver and will find themselves in turmoil if the yellow metal slips on the indices.
Considered as a safe haven for investments, these precious metals find their place in most portfolios, regardless of timeline and economic conditions.
With modern financial instruments like Gold ETFs and gold mini futures, a new arena of metal trading has begun. While the Government’s initiatives such as mandatory gold hallmarking and gold exchanges are focused on gold, silver is not far away. Silver exchanges, silver ETFs are likely to be rolled out soon.
Whether one should choose gold or silver entirely depends on the risk appetite, financial position and personal choices. But it is a must to understand how these metals trade and their use in hedging, to reap the benefits better.