Gold and silver are two popular investments for those looking for assets that can be both a store of value and an inflation hedge. These precious metals are both highly regarded and have long histories, but they offer different types of benefits and security, and investors should know how they are likely to perform in multiple economic climates before deciding to invest in either.
Here are the relative benefits of gold and silver and what to look out for.
Gold vs. Silver: Ways to Own It
When it comes to the number of ways you can invest in gold or silver, investors have plenty of choice:
- Precious metal
- Futures
-
Exchange-traded funds (ETFs) that own the precious metal
- Mining stocks
- ETFs that own mining stocks
Each way to purchase a precious metal has its own pros and cons. For example, if you want to buy gold bullion, you have to secure it yourself, making it less safe than owning it through an ETF. And if you own an ETF that holds physical bullion, you can also get the full price of your holdings on a public exchange, rather than trading it at a discount to a dealer. (You can even buy gold at Costco, even though it’s a bad investment.)
Mining stocks allow you to influence the price of gold or silver, so a profitable miner will become much more profitable as the price of the metals rises. But if investing in individual stocks is too risky and time-consuming, you can buy an ETF that owns miners and diversify your bet.
Whether you want to invest in gold or silver, you can do so in a way that suits your needs. But you want to understand the dynamics of each type of investment.
Gold vs. Silver: Long-Term Returns
How have gold and silver performed over time? Despite their reputation, that’s not a good thing, says Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University.
Comparing the performance of silver and gold since 1925, Johnson notes:
- “At the end of 1925, the price of an ounce of gold was $20.63. At the end of 2020, an ounce of gold sold for $1,893.66. During that 95-year period, the precious metal delivered an annual compound return of 4.87 percent.”
- “At the end of 1925, the price of an ounce of silver was $0.68. At the end of 2020, an ounce of silver sold for $17.14. During that 95-year period, the precious metal delivered an annual compound return of 3.46 percent.”
Those returns are not particularly impressive, especially in light of inflation, which Johnson estimates was 2.9 percent over that same 95-year period. A large part of these small returns is therefore further reduced by rising prices, causing investors to suffer from low purchasing power growth.
Still, gold has clearly had a better track record over time, leaving silver in second place.
Gold vs. Silver: Inflation Hedging
Gold is often touted as an inflation hedge, helping protect investors against rising inflation. So when markets get rough, many investors flee to gold to weather the storm.
Gold is a safe haven, says Mahesh Agrawal, associate director at Acuity Knowledge Partners, a business intelligence provider. “High inflation creates market uncertainties and drives greater investment in gold to protect the value of money,” he says. But he notes that “the marriage between gold and inflation can sometimes break down in the short term as interest rates respond to higher inflation, shifting investment into the debt market.”
The correlation between silver and inflation is also high, Agrawal says, but not as solid as with gold.
“Silver has natural properties that keep its value relatively stable amid inflationary uncertainties,” he says. “During high inflation, industrial demand for silver declines, largely offset by robust demand from the investment segment. When inflation is low, the situation reverses.”
Gold vs. Silver: Speculative Uses
The demand for gold and silver comes from different sources, with gold being primarily an investment asset and silver an industrial good.
Gold is typically used as a store of value and has relatively limited industrial applications, Agrawal says. “Investment and related sectors accounted for almost 90 percent of total demand for the yellow metal in 2023, and only 10 percent was consumed in industrial activities,” he said.
So the price of gold moves as investors evaluate their own investment needs, how much they want security and the return expectations of other asset classes such as stocks and bonds.
Gold’s relatively high price per ounce makes it easier for investors to store value compared to silver, making it cheaper to store an equivalent amount of dollar value.
As for silver, demand is driven more by industrial applications, such as electronics and solar cells, so it performs better during periods of economic stability and overall growth.
“For investments, silver mainly attracts smaller and private investors because it is more accessible and offers higher value given its lower price compared to gold,” says Agrawal.
Gold vs. Silver: Volatility
Silver tends to be more stable, in part because it tends to rise with economic growth while also providing a safe haven in tougher times, Agrawal says.
But over shorter periods of time, the price of silver can fluctuate considerably.
“Silver can be very volatile in the short term due to its relatively low liquidity, especially in the financial market,” says Agrawal. “Its volatile nature makes silver a riskier bet than gold, and investors should select the asset class that best suits their portfolio risk management requirements.”
Should you invest in gold or silver?
So, based on your specific situation, you can decide to choose silver or gold, taking into account the respective properties of each of these options and the economic environment when making your decision. But the post-inflation returns of buying and holding aren’t that impressive either.
But investors do have an alternative with quite attractive returns: large-cap stocks. Johnson compares buying an ounce of gold for $20.63 in 1925 to the same amount invested in a diversified portfolio of large companies such as the Standard & Poor’s 500 Index.
“That same $20.63 invested in gold at the end of 1925 would have grown to $225,788 if invested in the S&P 500,” says Johnson, for a compound annual return of 10.3 percent through 2020. That’s compares to just $1,893.66 for that same ounce of gold. gold.
In other words, investors would have about 119 times more money by investing in a diversified portfolio of large stocks than by investing in gold. The difference was even greater for silver.
Investors considering investing in gold or silver should then carefully consider whether it really makes sense for them. It may make sense in the short term or when there are specific imbalances in the respective precious metals markets.
But in the long run, the answer to the question “Is it better to go for gold or silver?” They could be ‘shares’. It’s actually incredibly easy to buy a diversified index fund that’s poised to rise, even if you have limited investing knowledge.
In short
Both silver and gold can act as safe havens, but gold tends to have a better track record over longer periods of time. That said, the specific dynamics of each market over shorter time periods ultimately become more important to their respective returns. Regardless of which asset you buy, remember that neither asset generates cash flow, so long-term investors may be best off taking a buy-and-hold approach with a portfolio of profitable and growing stocks.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
