Gold or silver: which is better?

Photo of gold and silver bullion coins side by side. — (Image credit: jessekarjalainen)

'Should I invest in gold or silver?' is a question that comes up a lot. In fact, a friend was asking me about it just this week. So let’s try to resolve it here and now, once and for all: gold or silver – which should you buy? Full disclosure: in my own portfolio at one stage I was geared as much as 70% towards silver and 30% towards gold. But in 2011, when silver went to $50, I rolled into gold and never went back. My physical allocation is now probably something like 90% gold and 10% silver. To be clear, we are not talking about mining companies, which are a different kettle of fish altogether – just physical metal.

Silver has a great deal more potential than gold. There is every possibility that the silver price could triple or quadruple from today’s price of just below $30 per ounce (oz). It could even go to $200. But my experience of 20 years’ investing in silver is that if it can find a way of disappointing, it will. The out-and-out silver bugs all scream manipulation, and maybe the silver market is manipulated and suppressed. Certainly, if all the longs on the futures exchanges were to hold out for delivery, the silver price would go shooting up. There is not the physical supply to deliver on all the contracts. That applies to many commodities, although to none, it seems, as consistently as to silver.

But why invest in something if forces are stronger than you are repressing it? It is unlikely, meanwhile, that gold will triple or quadruple from today’s price of $2,500/oz unless we enter into some kind of currency crisis or extreme inflation. Then again, the silver price could easily halve from $30/oz. I don’t think a 50% correction in gold is likely, except in the event of some deflationary financial panic or liquidity crisis such as we saw with Covid in 2020. In any case, such a correction would be temporary.

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What's the right silver-to-gold ratio

My friend was told to buy silver because the silver-to-gold ratio at 86 is high and should go lower. Let’s consider that argument. There is 15 times as much silver in the Earth’s crust as there is gold, and throughout all of history the monetary ratio between the two reflected natural supply. Fifteen silver coins got you a gold coin. But silver stopped being used as money in the late 19th century. The many gold rushes of the period increased the gold supply, and most countries around the world followed Britain’s model and adopted pure gold standards.

By 1900, China was the only major country in the world on a bi-metallic standard. Every other nation was on gold alone. In my lifetime, the silver-to-gold ratio has only once gone back to its natural levels of 15, and that was in 1980 for an afternoon, when the Hunt brothers’ infamous attempt to corner the silver market reached its climax. The reality is that the silver-to-gold ratio has gradually been climbing for a generation now, averaging between 50 and 85, although going above or below those levels at times of market extremity. In 2020, it went to 125.

I accept that the silver-to-gold ratio “should” be 15. In fact, perhaps it should be even lower because silver gets consumed, while gold does not. But in practice, I don’t think that ratio will ever go to 15 in my lifetime, certainly not for any extended period. The other argument that my friend was given to buy silver instead of gold was that silver has many industrial uses. This is indeed the case. But even though the range of silver’s industrial applications is expanding, the silver price has not taken off. Gold’s use throughout history has been to store or display wealth; silver’s has been to exchange it. Silver no longer has that use, nor is it likely to. We don’t use metal as a medium of exchange anymore. Money is digital. We don’t buy gold to become millionaires.

We buy gold to protect the value of what we have already earned. Gold will continue to do that. Silver might not. Silver is much more speculative. It has the potential to earn you more money than gold, but it also has the potential to lose you more than gold. Why not own both? Are you buying precious metals because you think fiat money is going to collapse and, in this hyperinflationary scenario, you’re suddenly going to become a multimillionaire, sweeping up assets at bargain basement prices because you own precious metals? Or are you buying them because you think the purchasing power of fiat money will continue to erode over the next ten or 20 years and you want to protect what you have?

If your purpose is speculation and you want to get rich, then maybe silver or silver options are a way to do that, or silver mining companies. But they are all also ways to become poor. If your purpose is simply to protect what you have earned, then gold is the way. There is a definite case for both. But understand why you are buying the metal and be truthful with yourself as to why you’re buying it. That will give you the answer between gold and silver. As for my friend’s question, I hedged: I suggested buying 75% gold and 25% silver.

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