Why gold’s prospects are brighter than that of silver

By Ghazal Jain

The precious metals space is definitely dazzling. Prices of gold and silver have appreciated by 32% and 43% year-to-date, respectively. Given that silver has outperformed gold in the recent run-up, investors now want to know which of the two is going to do better going forward. While silver is more accessible given that it is less expensive, and could have good upside potential in the short term given the momentum of speculative demand and supply disruptions, gold is the better investment option.

Gold’s prospects look brighter after Covid-19
Silver’s primary role is industrial, and its role as money is secondary to its use in industry whereas gold is primarily a monetary asset. With the global economy staring at a protracted economic deceleration, demand for industrial commodities like silver will be impacted. At the same time, accommodative stance of central banks and widespread stimulus measures to ease the pandemic’s blow will continue for the foreseeable future. This will be beneficial for gold as it is widely viewed as an asset that usually does well during times of rising prices and currency debasement.

Gold is a better diversifier
Silver prices, because of the metal’s industrial use, have a stronger relationship to economic growth. Thus, silver prices generally tend to move in tandem with equities. In contrast, gold gets a push in times of economic distress when equities tend to suffer. Gold is thus a better diversification tool to add stability to the portfolio in these times of unpredictable equity markets.

Gold prices are less volatile
As the overall market for silver is smaller than gold, the likelihood of large price movements caused by buying or selling by a few market participants is more for silver. Silver is thus more speculative and risky and prices tend to be more volatile than gold prices.

Gold is more liquid
Liquidity is an often overlooked consideration for investors which eventually impacts returns. Gold has a much larger, liquid market that is driven mostly by investment and jewellery demand. This gives it an edge in liquidity over silver, reducing liquidity costs and boosting its value. The bid ask spreads on silver are significantly higher as compared to that of gold thus leading to high impact cost on the buy / sell transaction.

Central banks prefer gold, too
Gold is an actively used central bank asset, while silver is not. So silver is more wide open for speculators, while gold prices tend to be more stable as they are supported by central bank buying and selling.

Gold is easier to invest in
Investors can choose to invest in gold through financial forms such as Gold ETFs and gold mutual funds, as well as digital gold and Sovereign Gold Bonds. These are all simple, convenient and efficient forms of investing in the metal. However, to be able to invest in silver, investors have to choose between the physical form or Silver Futures. Owning the physical metal is inefficient due to purity concerns and storage costs, while Silver Futures are complex, risky instruments better suited for sophisticated investors.

With all of the uncertainty in today’s global economy, it has never been more important to diversify and add the stability of gold to your investment strategy. Every investment portfolio should contain an allocation of 10-15% to the precious metal.

The writer is associate fund manager, Quantum Mutual Fund