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Silver vs. Gold: How the two metals compare as investments
Silver vs. Gold: How the two metals compare as investments
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Silver vs. Gold: How the two metals compare as investments

The world’s two best-known precious metals have surged this year. But there are differences that investors need to consider

So far this year, investors in gold and silver have made out like bandits, especially when you compare the returns of the world’s two best-known precious metals with those of stocks.

SPDR Gold Shares (GLD), an exchange-traded fund that tracks the price of bullion, and iShares Silver Trust (SLV), an ETF that tracks silver prices, were up 30% and 36%, respectively, through July 31. That compares to a measly 1.5% gain for SPDR S&P 500 ETF (SPY), which tracks the S&P 500 stock index, according to Yahoo. (All figures exclude dividends.)

As investments, gold and silver are similar in that they don’t pay dividends and both require investors to pay storage costs. But there are differences that could make one of the metals more suitable for a specific investor’s portfolio than the other. Or neither suitable at all.

Here are a few things to consider:

1. Liquidity

The gold market is far more liquid than the silver market, says Rohit Savant, vice president of research at New York-based commodities consulting firm CPM Group.

It also is larger in terms of the value of its annual supply. In 2019, the gold market was valued at $24.5 trillion, more than five times the $4.4 trillion value of the silver market, according to estimates from CPM’s Gold and Silver 2020 yearbooks, respectively. “The silver market is relatively less liquid with a slightly higher level of risk versus trading gold," Mr. Savant says.

While individual investors can easily trade into and out of holdings of both gold and silver, better liquidity means it is easier for investors who want to make large purchases or sales of gold do so without moving the price of the commodity. The relative lack of liquidity in the silver market could make some large-scale precious-metals buyers choose gold instead. This liquidity difference shouldn’t be a problem for those wishing to trade smaller volumes.

2. Volatility

The silver market is more volatile than the gold market, which can be a good thing or a bad thing, depending on the type of investor involved.

For traders wanting to make money from a run-up in prices, silver’s additional volatility is helpful because more volatility means larger price swings that traders can try to exploit.

“The biggest advantage for silver is volatility," says William Rhind, founder and CEO of New York-based ETF provider GraniteShares.

Why is silver more volatile? One reason, as noted, is the size of the market. What’s more, much of the silver supply is produced as a byproduct of the mining of other metals such as copper and lead. That means higher prices for silver don’t necessarily result in extra supply, which would tend to dampen a rally.

Silver outperformed gold significantly in the most-recent two bull markets for gold, according to data provided by CPM Group. From 2001 to 2011 gold rose 636% while silver rallied 904% over the same period. From 1993 to 1996 gold rose 28% while silver surged 63%, again over the same time.

But greater volatility also means more risk. As we saw earlier this year, the price of silver plunged far more than did that of gold during the peak of the Covid-19 crisis.

Short-term investors need to be agile enough to exit trades when the price trend changes from up to down or vice versa. And spotting these turning points is hard even for professional investors.

3. Diversification

Many investors add precious metals to their portfolio because prices of these assets tend to be uncorrelated to those of other securities such as stocks and bonds, thus reducing overall portfolio risk. When stocks zig, precious metals may zig, zag or do nothing at all.

But when it comes to diversification, gold has the edge over silver.

“Silver is more linked to the business cycle," says Mr. Rhind. When the economy is doing well, there is more industrial demand for silver and that can influence prices. There is little industrial use of gold.

“Gold is more disconnected and more uncorrelated to everything," Mr. Rhind says.

Typically, central banks buy gold, not silver, as a way to diversify the risk of holding other currencies, including US dollars, he says.

4. Storage costs

Investments in silver or gold are associated with certain expenses—specifically storage and insurance expenses—that most securities aren’t. If stolen, precious metals are largely untraceable, so investors typically place their holdings in vaults or other secure facilities. There are charges for renting such space, insuring the assets, and then for transporting the metal when it gets sold or purchased.

Again, there is a difference in how this affects gold and silver investments.

Investors would need to rent far more space in a vault for $1 million of silver than they would for $1 million of gold. That‘s because $1 million would buy 41,118 troy ounces of silver versus 505 ounces of gold at recent prices. A standard bar of gold is typically 400 ounces. “In terms of storage or transport then gold is a better option," Mr. Savant says.

For investors who buy gold or silver through ETFs or mutual funds, these differences may not be a problem, as annual fund expenses tend to be low. The gold and silver ETFs mentioned above, for example, have annual expenses of 0.4% and 0.5%, respectively. They benefit from economies of scale, but those costs are still much higher than those of SPDR S&P 500, which has annual costs of 0.09%.

Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.

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