Gold vs Silver: Which Is The Better Investment?

I know a lot of silver stackers are also fond of other precious metals, particularly gold.  You may be wondering "Which metal should I add to my stack next?".  Of course, as is often the case, the answer is “it depends”.

It’s important to understand the differences that separate gold and silver, and also what they have in common. Both are elements, fundamental forms of matter that cannot be chemically broken down any further. Both metals have unique chemical and physical attributes that make them useful and desirable. Gold and silver are rare and have served successfully as both money and a store of value throughout human history.

How are gold and silver unique from one another?

In terms of useful materials, silver is second only to petroleum.  Silver is extremely malleable and ductile, it can be beaten into thin sheets and drawn into wires.  Of all the metals, silver is the best conductor of both heat and electricity. Silver is both non-toxic and anti-microbial, making it quite useful for a variety of medical and consumer applications. The constant consumption of silver by industry creates a significant demand for the metal.

Although gold does have useful physical properties such as excellent electrical conductivity and corrosion resistance, far less of it is consumed by industry than silver. The primary uses of gold are investment and jewelry. Central banks and nations hold gold as a key reserve. Institutions and individual investors invest in gold to insulate themselves from economic shocks and crashes. Gold jewelry serves as both adornment and a store of generational wealth passed down within families.

The gold market is huge, with a market cap over $7 trillion. For comparison, the market cap of Apple is about $890 billion. The gold market has a depth and liquidity rivaled only by the largest sovereign debt markets. Large amounts of gold trade hands each day, and it takes quite a bit to make the market move a substantial amount.
The silver market is much smaller than gold. Annual physical demand for silver is valued at $15.2 billion dollars. The relatively small size of the silver market, along with lower liquidity than gold, means the price of silver is more volatile than that of gold. While the two metals do tend to move up and down with one another, silver usually moves up a great deal more than gold in a  bull market, and silver also drops faster during a bear market.

An important gauge of value to consider is the silver to gold ratio. This is simply the number you get when you divide the price of gold by the price of silver. In other words, the ratio expresses how many ounces of silver it takes to buy 1 oz of gold. Since the year 1687, this ratio has ranged from 14:1 to 99:1. Before the year 1900, the average ratio was 16:1. During the 20th century, the average silver to gold ratio was 49:1. In 1792, the US Constitution prescribed a ratio of 15:1. To give you a point of reference, in the Earth’s crust, the ratio of physical silver to gold is 17:1.  Right now, the silver to gold ratio is a whopping 86, with a silver price of $16.46. If this ratio were to revert simply to the average from the 20th century of 49:1, with the gold price at today’s level of $1420, silver would be valued at more than $28, a greater than 50% increase from today’s price.

The silver to gold ratio gives you something you think about. Based on the ratio, silver is significantly undervalued relative to gold. However, there’s no rule saying the ratio can't go even higher.

Another important consideration is storage. Silver is slightly less dense than gold, and so each ounce takes up a bit more space. Couple that with the fact that it takes 86 ounces of silver to equal the value of 1 ounce of gold, and it becomes clear that the stacker of silver has a much greater storage dilemma than the stacker of gold. If space is at a premium, or if you need to maintain a degree of mobility with your metals, gold may be the better choice. Needless to say, concealing gold from prying eyes is also a less daunting task than hiding silver. This may seem trivial to some of you, but I suggest you try walking down the street with a one ounce gold eagle in one pocket, and 86 one ounce silver eagles in the other, and you’ll quickly get a different perspective.

Which is the better investment?

Well, as of right now, I think silver represents the greater value. When a precious metals bull market begins, silver will most likely have greater upside than gold. However, if you value mobility and space savings, gold is the better choice. If price volatility is something you shy away from, gold also may be the way to go. Holding some gold and some silver is probably the best option, with your personal allocation depending on your individual needs. Regardless, I feel more comfortable holding either gold OR silver than I do holding fiat paper dollars.

So what will you be stacking next? Let me know in the comments below, or tweet at me @stacksmarter ! And remember don’t just stack, stack smarter!

(This is an updated version of a post originally published on a previous version of this blog on 11/24/2017.)