A question that is often asked, particularly by newcomers to the precious metals space, is “should I buy gold or silver?”. This is something that must be determined on an individual basis given there are numerous factors to consider.

The first question that you should ask yourself is why are you buying precious metals in the first place? Are you using it as a store of wealth with the aim of maintaining your purchasing power? Are you planning on buying precious metals for the capital gains? Lets discuss how the answers to these questions will guide your decision.

Maintaining purchasing power

The purchasing power of gold, silver and USD (Source: Superfund)

If the aim of purchasing precious metals is to preserve wealth, then the metal must maintain its purchasing power over time. The chart above shows that the purchasing power of the US dollar has fallen significantly over time. The chart also suggests that gold has consistently been better than silver as a store of value. The only exception to this was the spike in 1980. In general, this suggests that gold is better than silver at maintaining purchasing power.

One of the big reasons why gold is a better monetary metal than silver is the stock to flow ratio. The stock to flow ratio of a commodity is the existing supply divided by the annual production.

Stock to flow ratio of gold, silver and other commodities (Source: Incrementum)

The above chart shows the stock to flow ratios for various metals and commodities. The best form of money is something that has a high stock to flow ratio. Preferably, the stock to flow ratio should not fluctuate significantly. Gold has a much higher stock to flow ratio than silver. Silver is consumed because of its industrial applications and is also more abundant in the ground (8 times more abundant than gold), therefore it’s stock to flow ratio is lower and tends to fluctuate more than the stock to flow ratio of gold. For these reasons, although silver standards have been used historically, note that they have never been as successful as a gold standard.

Capital gains from precious metals

When considering buying precious metals for their capital gains potential, the following factors should be considered when deciding between gold and silver.

Risk reward asymmetry

Gold vs silver in USD, monthly scale

The above chart compares the prices of gold and silver. The gold price bottomed in 2016 and broke out of the bottoming trading range in 2019 and went on to surpass its previous all-time high. Silver broke out of it’s bottoming trading range at a later stage, in 2020, but has yet to reach it’s previous all time high. The downside of silver appears to be less than the downside for gold, yet both metals both have potentially large upsides. This suggests that the risk reward asymmetry is greater for silver than it is for gold.

Gold silver ratio

The gold silver ratio, monthly scale

Another way of deciding which precious metal is the best value is to look at the gold silver ratio. The above chart shows the gold silver ratio on the monthly scale. As discussed in a previous article on valuations this ratio seems to be one that mean reverts. That means that when values reach extreme levels, we can expect it to reverse back towards mean levels. When the gold silver ratio was at historical highs (over 120), there was no doubt that silver provided better value than gold at that point.

The beta of silver to gold

The beta of silver to gold (Source Kitco)

The beta of silver to gold is the relative change in price between the two assets. A beta of one means that the prices of both assets move by the same magnitude. The chart above shows that over the last 20 years, the beta of silver compared to gold was approximately 1.2. This tells us that silver has the potential for greater capital gains relative to gold, but it also means that losses can also be greater.

Volatility

The volatility of silver and gold (Source: Bullionvault)

How much volatility can you stomach? The above chart shows the daily difference in price changes for gold and silver. Any values above zero mean that silver had a greater percentage move than gold. Note that this chart does not tell us which direction that move was, however it does show that the silver price is much more volatile than the gold price. Although the potential rewards for investing in silver are greater, so are the potential losses.

Considerations when deciding between gold and silver

Once you are clear about why you are investing in precious metals, the next step is to take the following factors into account for your individual situation.

  • Premium over spot price
  • Affordability
  • Storage
  • Taxes
  • Loans and leasing

Premium over spot price

Physical gold premium over spot price (Source; didthesystemcollapse)

Currently, the premium for physical gold in USA is approximately 8%.

Physical silver premium over spot (Source didthesystemcollapse)

The premium over spot for physical silver is much higher than gold, at approximately 20%.

Affordability

In terms of affordability silver has the advantage over gold. A double digit per ounce cost for silver is much more accessible than the triple digit cost for gold. That is particularly important for those working on a small budget. It is possible to liquidate silver in small amounts and is therefore useful for making small everyday purchases if needed.

Storage

Silver storage can be an issue because silver takes up a lot more space than gold does. Silver has half the density of gold (ratio 1:2), and the value of silver per ounce is much lower than that of gold. If we assume a gold silver value ratio of 1:70, you would need 140 times the space to store the same value of silver compared to gold. As a result, storage fees are understandably higher for silver.

An example of storage fees for gold and silver

In general, the cost of silver storage is four times that of gold storage.

Taxation

Depending on your location, taxation rules might differ between the precious metals. For example in UK there is a 20% value-added tax on silver bullion purchases. That means that you would need the price of silver to go up not only 20% to make up for this tax, but you would also need to account for premiums and storage fees just to break even.

Capital gains taxes are usually the same for both gold and silver in most countries but it is worth checking on this in your individual country.

Loans and leasing

Precious metals loans and leasing is not widely used at the moment because very few people own precious metals, but it may become more popular if precious metals investing becomes more mainstream. In general it is much easier to obtain a loan using gold as collateral rather than silver. If leasing of metals becomes mainstream for obtaining an income then it is likely to be easier to lease gold rather than silver due to the higher status as a monetary metal.

Conclusion

This discussion shows that both gold and silver each have their merits. Most investors prefer to own both, however the weighting of allocation to each metal varies depending on individual preferences. The multiple factors discussed here will help you to determine appropriate weightings for your portfolio.