Article By: Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel Broking Ltd
Gold usually falls under a category of asset classes that is picked by investors to hedge against other investment portfolios during times of market volatility. Gold is often preferred over silver, even though silver could also be considered a safe option during times of crisis or economic downturn. The current situation, however, is being attributed to the pandemic, combined with a weakening U.S. dollar.
The same factors are being ascribedto the increase in demandfor silver. That said, gold and silver have not lost their sheen even during good times. Many investors continue to set aside a specific portion of their assets in the form of gold or silver, as a part ofa portfolio diversification strategy. While there are several similarities, certain key differences exist as well, and investors are advised to acknowledge them before investing.
1. Gold is more expensive than silver due to supplyshortages-
In terms of prices, the gold-silver ratio is a very disproportionate one. You need several ounces of silver to be in a position to purchase an ounce of gold. The gold vs. silver price ratio stood approximately at around 72:1 until the first quarter of September 2020. It indicates that at a given point, gold was seventy times more precious for every ounce of silver. Beyond this price disparity, the gold-silver ratiobefore the month of March was even more dramatic. It stood at a historic 120: one. To put the enormity of the differential into perspective, the 21st-century average stabilized around an approximate 60:1 mark.
Even when silver performs well, it does not feature in the proximity of gold’s value. Gold is the rarer metal of the two, andit asserts a higher value as a consequence. The supply shortages of gold are very evident, with experts observing a drop in the worldwide mined gold assets in the year 2019. It was limited to just 3,300 tonnes, as compared to 27,000 tonnes of silver.
2. Gold is less volatile than silver –
Gold continues to be the first choice for a long-term investment, despite the short-term fluctuations that could sometimes stir-up investors. During the 30 years between 1989 and 2019, the annualized volatility of gold was only slightly higher than that of the S&P 500 Index, with 15.44% for gold and 14.32% for S&P 500 respectively. On the other hand, silver’s volatility is usually almost twice as that of gold. Additionally, as compared to the gold market’s size, the silver market’s size is significantly smaller. The gold market is valued at $24.5 trillion, as compared to silver’s $4.4 trillion. However, similar results can be observed in terms of susceptibility to price swings.
As mentioned, the overall silver market value can compare to just a fraction of the gold market’s value. Therefore, silver is more appealing than gold in only one respect i.e. if you are interested in speculating on short-term fluctuations. However, if you are an investor with an interest in long-term hedging, gold is the more attractive option.
3. Merits in terms of diversification –
It is a general tendency amongst investors to include precious metals into their portfolio. The reason being that the price of precious metals does not correlate with those of other securities such as stocks and bonds, thereby reducing the overall portfolio risk. This widens investment options, making both gold and silver a hit with investors. However, gold comes out on top as the more prominent one of the two metals, when it comes to diversification. For instance, central banks buy goldinstead of silver, as the approach for diversificationis associated with the risk of holding other currencies, including the U.S. dollar.
4. Comparison in terms of industrial applications –
Silver is used in larger quantities for industrial applications as compared to gold, while this requirement makes silver a high-demand commodity. Silver has the properties of being reflective, and thermally and electronically conducive. The last two decades have shown that there were morepatents for silver than gold.Moreover, the last ten years have witnessed the use of 1 billion ounces of silver in consumer products. This is one the aspects where silver has attained an edge over gold. It is therefore logical to expect a rise in the price of silver in the years to come
For those who envision an investment in precious metals, gold and silver are the two most popular choices of the day. Moreover, Indians have ornamental utilities for gold, and it is a go-to commodity for investors,as it presents a diverse range of investment options.The emergence of digital gold further bolsters the position it enjoys among investors. Digital gold has made commodity investments more affordable, eliminating concerns of high storage costs. Gold assets are now being purchased in the form of exchange traded funds (ETFs) and e-Gold. ETFs can now be operated through demat accounts, facilitating smooth transactions in digital form. Furthermore, e-wallets and payment gateways are also offering options to trade e-Gold in variable quantities, which has allowed smartphone based transactions and rewards in the current crisis times, when acquiring physical gold has become a challenge.
These differentiations will make it easier for investors to narrow down the preferences. The key is to make an informed decision after factoring in the above differentiations, so as to maximize opportunities for returns.