Gold and silver, friends or foes?
30 de ene de 2023
Why should an investor choose one of these traditional precious metals over the other?
Gold and silver are global investment assets that are typically heralded as potential inflation hedges, having been historically considered good stores of value around the world. But how do these precious metals compare and how should a mindful investor approach them? We have analysed gold’s performance in detail in our last post, so let’s now focus on how silver fares against the more popular aureate metal.
To begin, industrial applications for silver are the main driver of its yearly demand, accounting for roughly half of it – especially due to its excellent electrical conduction characteristics. Conversely, gold’s demand is mostly derived from its appeal as a safe haven, i.e. for investment and jewellery, with only roughly 10% of its yearly output destined for industry uses. In other words, silver is more of a pure commodity, whereas gold, despite paying no dividends, has attained a clearer status as a true financial asset, given that many central banks and institutions have been holding it in their reserves.
In any case, it’s important to note silver is also considered to have safe-haven properties, but a 2021 study by French researchers concluded only gold demonstrates this ability in the long-run, whereas silver and others only show it in the short-term.
Secondly, looking at average prices in the past decade, gold has been trading roughly around €1,500 per ounce, whereas silver has been converging at the €20 per ounce mark – a 75 times difference in price (and a 9 times difference in market capitalisation).
However, silver is more volatile than gold and its intraday volatility can be more than two times higher that of its more lustrous sibling – even if both are fairly correlated in the grand scheme of things, with a 1-year rolling coefficient of 0.8 in the past decade.
For example, in 2011 the price of silver was only 30x smaller than that of gold, as silver experienced an explosive spike on the aftermath of the 2008 financial crisis. This move happened because, among increased industrial demand, retail traders perceived it as more affordable than gold and the fear of missing out led other investors to pile in on the trade. At least until a rapid crash that soon followed, with its price falling up to 50% in less than three months, half of it in just two wild days! Conversely, gold only fell by 20% later that year, in a more sustained, less spectacular descent.
Lastly, in terms of supply, we can’t miss the fact that silver’s yearly output in weight is also eight times larger than gold, making it a less scarce – also contributing to the narrative that gold is more precious. And there’s nearly 20 times more silver to be unearthed than gold, at least until another meteor lands with fresh shiny material.
The implication here, but also extracted from the other points, is that if one is aiming to take custody of their bars and ingots then silver will require much more space than gold to store the same amount of wealth. Even if custody is outsourced, logistics and storage costs tend to be higher for silver. However, note that some new depots are now charging a percentage of the asset value instead of a fee per volume occupied.
All-in-all, both metals provide interesting opportunities but tend to suit different investment profiles. Those who prefer to hold assets that are tied to the real economy, or those who prefer a more exciting trading environment, should favour silver. Those who prefer to hold assets that have historically proven to be more attractive to a more general audience, or those who prefer to invest for the long-term, should favour gold.
And, if one wants to maximise gains, it’s key to remember these assets are highly correlated and one’s choice should always be part of a well-diversified portfolio!
About Sun Valley
Sun Valley is a private equity firm focussed on the precious metals industry with portfolio companies and branch offices in the Americas, Europe and Asia. Sun Valley seeks to invest in sustainable development projects and operations with growth potential, low cash costs of production, or the operating flexibility to insulate against volatility in the commodity markets.
The information contained or referenced herein is for information purposes only in order to provide the views of Sun Valley and the matters which Sun Valley believes to be of concern to shareholders described herein. The information is not tailored to specific investment objectives, the financial situations, suitability, or particular need of any specific person(s) who may receive the information, and should not be taken as advice in considering the merits of any investment decision. The views expressed herein represent the views and opinions of Sun Valley, whose opinions may change at any time and which are based on analyses of Sun Valley and its advisors.
Partner / VP Business Development