Gold vs Silver as an Investment

First and foremost, investing in gold or silver should be viewed as an approach to wealth preservation rather than for its ‘rate of return’.

Over the decades and centuries, precious metals have proved effective as a hedge against inflation and fiat currency devaluation. 

In this analysis, investment in gold and silver refers to purchasing physical gold and silver in the form of sovereign-minted bullion coins, bars from reputable refiners or allocated gold and silver platforms. 

Is gold or silver a better investment?

Gold and silver are considered a favourable investment over many other types of assets.

Here are the four main metrics investors should consider when choosing either or both precious metals for their portfolios.

1. Gold and silver price

Using measures such as the ratio of the S&P 500 and the 10-year U.S. Treasury bond price against the price of gold and silver, the two investment metals are currently undervalued relative to financial assets, like stocks, bonds or real estate. 

So, a gold or silver investment offers the potential for wealth preservation as well as outperforming other financial assets as investments.

Gold has more than protected investors against inflation since the turn of the millennium. As Douglas Turner, Kinesis Head of Content, explains:

“Gold has been the asset class to successfully hedge against inflation. It has proven to be the safest store of economic value for centuries. Gold has increased in value by 500% in the past 20 years.”

Silver is an asset that many have labelled unfairly as only being useful in economic downturns. That common silver myth is unfounded because the precious metal’s price appreciation opportunities come from its scarcity and vulnerability. As Alex Boast, Kinesis’s In-House Writer, explains:

“(Silver) can also be used in many retail and industrial use cases which means it is beneficial whatever the state of the economy, and investors looking to diversify their portfolios can consider this precious metal a solid investment when looking at the long-term.”

2. Volatility of gold and silver

The price of silver is more volatile than the price of gold. This is a desirable attribute during precious metal bull cycles and a potential detriment when each value is in decline.  However, the gold-silver ratio can be useful as a guide when deciding to invest in one metal or the other. 

3. Gold silver ratio (GSR)

The chart shows the gold-silver ratio (“GSR”) since the beginning of the current precious metals secular bull market (2001). The ratio shows the amount of silver ounces required to buy one ounce of gold.

When the GSR moves above the green horizontal line at 80, silver is statistically undervalued relative to gold, and thus it would be more rational to purchase silver than gold.

4. The utility of gold and silver

When the gold-silver ratio is at levels considerably lower than 80, the determination of which metal to purchase should be based on the relative utility of each as a core asset holding. For example, a 100 oz bar of gold “stores” a lot more wealth than its counterpart, a 1,000 oz bar of silver. 

On the other hand, over hundreds and thousands of years, silver has had the benefit of superior fungibility or use as an everyday currency.

Investing in silver and gold can be viewed as the “anchors” in any investment portfolio. Again, the percentage allocation to the metals is based on personal risk and time horizon preferences.

However, because gold and silver have proved to be superior wealth preservation assets over hundreds of years, they should be regarded as a core long-term holding independent of the relative volatility of each over shorter periods of time.

Long-term returns from investing in gold and silver

Much online gold and silver investment advice refers to both metals’ substantial nominal price gains in the past 50 years. While this is true, the gains when inflation is taken into account are impressive too.

In January 1971, the gold price was $34.00. Now that’s at $2,301.18, an increase of over 6,600%. In November 1971, the price of silver was $1.33. Today, that’s over $30.00, a rise of 2,100%.

If gold had appreciated at the same rate as inflation, it would be worth $255.85. If silver had done the same, it would be worth $10.01. So, when inflation is factored in, the value of your investment in gold would be just shy of 800% higher and your silver investment 200% higher.

As you can see, historically, gold and silver investing is a source of significant gains in asset value, even with inflation considered. Remember though that past performance is no guarantee of future performance.

How can you invest in gold and silver?

To reap the full utility of gold and silver as asset preservation assets and portfolio investments, many choose to buy physical gold and silver in the form of bullion coins and bars or purchase physical gold and silver via platforms such as Kinesis, or a combination of both.

In terms of the physical gold and silver that I own, I have roughly a 50% allocation to each metal. This is the long-term wealth preservation portion of my portfolio.

 In addition, if I need to sell some, sovereign-minted coins are recognised almost anywhere in the world, offering better liquidation liquidity than other forms of physical gold and silver.

In lieu of self-custody, precious metals investment accounts that are backed by real physical metal, such as Kinesis make it easy to invest directly in physical gold (KAU) and silver (KAG). 

In addition to the various account features available, services like Kinesis make it possible to trade in and out of gold and silver positions daily, which would be convenient for market timing trades.

While it’s ideal to invest in both metals, when silver is undervalued relative to gold per the gold-silver ratio, it makes sense to buy silver instead of gold. Both gold and silver should be considered an integral part of any investment portfolio. 

In addition to reducing the volatility of an investment portfolio and providing a hedge for stock, bond and real estate investments, physical gold and silver investing provides durable and reliable wealth preservation over the course of long market cycles.