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Investing in Gold vs. Silver: 3 Key Differences to Know
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Investing in Gold vs. Silver: 3 Key Differences to Know

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Investing in Gold vs. Silver: 3 Key Differences to Know

When the economy is tanking and inflation is high, investors often rush to gold. Silver is also viewed as a safe-haven investment, though it gets a lot less hype.

Both precious metals have been sought after throughout history, so they're appealing when stocks and currencies are losing value.

In August, pandemic worries coupled with a weakening U.S. dollar sent gold prices skyrocketing to over $2,000 an ounce for the first time in history. Silver has also rallied. For the first time since 2013, silver prices soared to $28 an ounce in August, a 140% increase from its 2020 low.

Even in good times, many investors keep a small percentage of their assets invested in gold or silver as a portfolio diversification strategy.

While gold and silver have similar boom-and-bust cycles, there are a few key differences to consider when you're deciding whether investing in gold vs. investing in silver is a better move.

Image source: Getty Images

1. Gold is more expensive due to its smaller supply.

Gold can be prohibitively expensive if you want to buy physical metal. Let's look to the gold-silver ratio, which tells you how many ounces of silver you'd need in order to purchase a single ounce of gold.

The gold-silver ratio was around 72-to-1 at market close Sept. 9. That means ounce for ounce, gold was 70 times more valuable than silver.

Back in March the gold-silver ratio was actually much higher, breaking 120-to-1 for the first time in history, though the 21st century average is about 60-to-1.

Translation: Even when silver is expensive, there's a reason it's known as "the poor man's gold."

Gold is more expensive because it's by far the rarer metal. Worldwide, just 3,300 tons of gold were mined in 2019, compared to 27,000 tons of silver, according to the U.S. Geological Survey.

2. Silver's industrial uses make gold the hedge of choice.

Gold and silver prices tend to move in the same direction, but gold is a better recession hedge.

More than half of the demand for silver is driven by its countless industrial uses. It's widely used in electronics, automobiles, solar panels, medicine and manufacturing, to name a few.

Because it's so vital to industrial activity, demand for silver tends to rise and fall with the overall economy. When production picks up, silver prices are likely to increase. If it slows, silver often tumbles.

Gold usually surges when stocks are down. From December 2007 to May 2009 -- aka, the Great Recession -- the S&P 500 fell 37%, but the price of gold rose by 24%.

Not only do investors drive up gold prices in a bear market, but the yellow metal is relatively insulated from slowdown in economic activity because industrial uses are so limited. In the long term, though, S&P 500 returns have historically crushed returns on gold.

3. Silver is more volatile than gold.

While short-term fluctuations in gold prices get a lot of attention, gold is relatively stable as a long-term investment. The annualized volatility of gold was only slightly higher than the annualized volatility of the S&P 500 during the 30-year period between 1989 and 2019.

The silver market's small size relative to the gold market makes it susceptible to wild price swings.

While silver is mined at eight times the rate of gold, remember: Gold is currently over 70 times more valuable than silver on an ounce-for-ounce basis, so the overall silver market is worth just a fraction of the gold market.

Adding to the volatility: More than 70% of the silver supply is produced as a byproduct of mining for other metals, like copper and gold, which makes the silver supply less responsive to changes in demand.

Because of silver's volatility, it may be more appealing than gold if you're seeking to speculate on short-term fluctuations. But as a long-term hedge, gold is clearly more attractive.

A golden investment opportunity

While many investors seek out gold and silver in physical form, like bullion or coin, a better option is often to invest in mining stocks. You'll avoid the headaches that come with storing and selling physical gold and silver, plus you may earn dividends. For those seeking greater diversification, a gold ETF or silver ETF will be a better option.

Just remember that both gold and silver can be risky assets. As a rule of thumb, they shouldn't account for more than 10% of your overall portfolio.

Investing in precious metals can be an effective hedge against a downturn. But when it comes to long-term performance, the S&P 500 glitters far more than gold and silver.

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