Gold vs. Silver: Investment Pros and Cons

Gold tends to get more attention from the markets than silver. Golds performance through the first half of 2016up over 25% for the six months grabbed more headlines in recent midyear market reviews.

But silver has bested its yellow metal brethren so far in 2016. Through the first half of 2016, silver prices appreciated more than 38%.

Silvers out-performance has many more people looking at it as an investment alternative to gold. The entry price is much lower between $18-19 per ounce as of this writing, compared with over $1300 per ounce for gold. While both metals are considered precious, there are distinct differences between using gold and silver as part of your wealth management plan.

Between gold and silver, which is a better investment? Here are some pros and cons to consider:

Silver has greater abundance

There’s generally more raw silver in the world to be mined than gold, which helps explain the wide per-ounce price difference between the two precious metals.

But it’s important to consider how the dynamics of supply and demand work in driving the silver market. Demand for silver has gradually increased since 2010, according to a Bloomberg analysis of data from CPM Group. (See chart below.)

Over that same period, supply increased but has not risen to the same level as demand. This gap between silver supply and demand has contributed to silvers strong performance so far this year.

Estimates from earlier this year show silver supply in 2016 dropping for the first time in five years. So even as demand increases, the supply in the marketplace will likely not keep pace, setting the stage for prices to increase.

Silver has more industrial uses than gold.

Demand for silver is driven in large part by manufacturers using the raw metal in production processes. One estimate placed industrial demand for silver at over 50% of total demand. For gold, the industrial share of demand is estimated at only 10-15%.

As a raw material, silver goes into the manufacturing process of a wide range of products, from surgical tools to batteries to electrical components.

While these greater uses for silver can influence demand for the metal, it also means the price of silver can be closely tied to the business cycle. When manufacturing activity slows in an economic contraction, demand for silver will likely dry up and its value will decline.

Gold as an alternative currency

Investors look to both precious metals for generally the same reasons they’re seeking to grow their investment through price appreciation, or they’re looking to shelter their wealth when other asset classes pose higher risks.

Gold has a greater allure as a store of value among investors looking for wealth preservation. So when market anxiety is running high and investors are seeking to convert their paper wealth into real assets, gold tends to garner more attention than silver.

But silver can a play a role in wealth preservation too, especially for investors looking to diversify their precious metal allocation. Gold and silver historically have not had a symbiotic relationship. In fact, the price relationship between the two metals has fluctuated constantly over time.

Looking at the gold/silver price ratio over the past 10 years (see chart below), you can see periods where silver was undervalued relative to gold (identified by the peaks in 2008-09 and more recently in 2016.

Gold is easier to store.

An ounce of gold and an ounce of silver weigh the same, of course. But in dollar terms, $10,000 of gold (around 7.5 ounces at current prices) is much smaller in size than $10,000 of silver (over 500 ounces at current prices.) Just because of the price differences, you don’t need as much space to store the same dollar amount in gold as you would in silver.

Gold also has a greater density than silver. A 10-ounce gold bar is around half the size of a 10-ounce silver bar. (This video shows a good demonstration of the difference.) That also makes gold bullion more attractive as a safe haven you can get a smaller safe deposit box or personal safe to store your physical gold in bars or coins.

Whether you’re considering a purchase of gold or silver as a long-term investment, be sure to weigh the advantages and disadvantages of both metals with a wider perspective of your overall wealth preservation plan.

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