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Should I buy Gold or Silver?

February 5th, 2018 at 09:52 am

This is part 2 of Milly's "Precious Metals for Beginners" series. For part 1 see: Why you NEED Precious Metals in your Portfolio.


One of the first things to consider is what type of metal to buy.  I'm only going to consider silver and gold in this analysis for 3 reasons.

1. Other precious metals such as platinum and palladium are foreign to the average person.  Yes, they are valuable.  Yes large dealers know what their worth and you could probably sell them when ready.  You'd have a much harder time selling them to your neighbor though.  They look a lot like silver and most people have no clue what their worth is.

2. Copper and other industrial metals have little value when compared to other things you could put in storage.  At today's prices, a pound of copper is less than $3.  The upside to copper is it is fun.  For less than $2 extra on your gold coin order, you can get an extra replica (made out of copper, larger, and with a different reverse) just to play with.  Or you can get other designs just for fun.

3. I've only studied gold and silver, so anything I say about other metals is unfounded.

Denomination
In some ways asking if you should buy gold or silver is akin to asking if is it better to put your cash savings in $1 bills or $100 bills.  Both operate by the nearly the same means, but have different liquidity and portability.

Silver is a great choice because it is more divisible.  Although gold can be pounded to 0.000002 inches thick and easily broken down to less than a cent's worth in value, the smallest bars major dealers circulate is 1/2 gram and rarely under 1 gram (that's tiny and very thin!).  At today's $1,330ish spot price, 1 gram is worth about $43 USD.  Silver, however, is at about $16.70/toz (at the time of writing) and also can sell in 1 gram bars that's $0.54 a bar!  Smaller denominations make it much easier to actually use for things like groceries.

The problem is, if you try and put some of your life savings into precious metals, that could amount to quite a bit of silver.  You can carry enough gold just on your person to start a new life.  It is also easier to hide since gold is much smaller than it's silver equivalent.  If gold were $1,330/toz and silver were $16.70/toz, the gold would be about 80
times lighter and about 147 times smaller than the same value of silver!

I guess, it comes down to how you imagine needing the metals. Will they be used for day to day life? or bulk wealth preservation? Probably a mixture of both.

Markets
Another consideration is the two have separate markets and their relative prices vary.  Right now, Gold is about 80 times the price of silver.  Since 1995 (just before the dotcom boom), that ratio has averaged around 62.  In other words an ounce of gold will buy more silver today than it has for most of the last couple of decades.  Silver is "on sale" in terms of gold.  Of course, there is always the possibility that this is the new norm.

Another thing to note is that silver might be more volatile than gold.  If you normalize the two metals in 1995 like I did in the graph below, you see that silver jumps to a higher percent gain than gold does in both the dot com and housing crises, then comes back together at the resolution.  If you are trying to play the market, buying low and selling high, silver might be the more useful vehicle.



One final market consideration is found in monetary policy.  Fiat currency is starting to fail on a global scale.  No country is willing to admit this because they are desperately trying to keep confidence in their paper money, but the complex systems of national debt, supposed assets, and inflation have reached unsustainable levels.

In the background, India, Russia, and China are buying up immense amounts of gold.  A while ago I heard some whispers about a backing of the dollar by gold and other assets. A few months ago I heard one about indirectly backing the Chinese yuan with gold.  Both of these seem like very far fetches, but what choice do we really have?  With Donald Trump's nominating 5 of the 7 Federal Reserve Governors recently and in the near future and Trump's history of "stirring the pot", who knows?  Maybe he could actually pull something off.

Regardless, I think it is clear that countries know that gold is their best chance for a favorable end game, but it is a very delicate game. There is a lot more money than gold (at the current prices) and no one wants to loose the confidence of their currency.

If any country does make the jump, it will likely put a huge upward move on the gold price and not have the same amount of force on silver.

Of course, that also means a higher confiscation risk, especially with the historical precedent. I don't think silver will be cost effective for the government to confiscate, at least not at the individual level.

Summary:
Silver is better for day to day bartering.
Gold is more efficient in terms of size/weight.
Silver may be a better deal right now.
Silver may be better for playing the market.
Gold may be better for long term moves.

How you should invest is based on your personal needs and philosophies.

Good luck and enjoy your shiny wealth!
-Milly

This is part 2 of Milly's "Precious Metals for Beginners" series. For part 1 see: Why you NEED Precious Metals in your Portfolio.



Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

2 Responses to “Should I buy Gold or Silver?”

  1. snafu Says:

    I wonder why you haven't mentioned small cap, gold Exchange Traded Funds. Using a low cost, no cost electronic brokerage, you can choose one of .Morningstar's Best Small Cap, Gold ETF to DCA with reasonable assurance of coming out ahead over the long term.

  2. Milly Says:

    That is a great point if you want more precious metal exposure. The reason I don't do metal funds personally is because gold and silver double as a global meltdown protection. I want to keep that entirely within my own control.

    In the case of a gigantic global financial crisis, there's a decent probability that your electronic assets will be inaccessible. In face of large crashes, it is already standard to shut down the market for a while. I think the next crisis will lead to an extended shutdown (less than a year, more than a month?). Remember, electronic assets in Greece have had strict capital controls since July 2015 and are expected to continue restrictions all of 2018 as well. Our debt crisis is just around the corner as our debt raises, GDP continues it's depression, and government security yields increase. (more info on a US lockdown)

    Bottom line: I want to keep a supply of precious metal insurance with me, and diversify my electronic money so I don't have my metals exposure overly weighted.

    Note: if you do want easily traded funds exposed to precious metals, you might want to look into mining stocks. They are considered higher risk, but as far as I can tell, they have lagged the recent gold price breakout and might be a great buy opportunity.

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