Across the years, I have had the opportunity to come across many new investors looking to add Precious Metals into their portfolio. “Should I buy Gold or Silver? Or both?” This is a question that I hear frequently, and the answer really depends on what each individual is looking for. Let’s first discuss on the use of these two precious metals.
Gold is a Precious Metal that is well known for two key uses – a safe-haven metal, an alternative asset useful for portfolio diversification and as a main product used in the jewellery market. China and India, two of the largest market for physical Gold, have demand for the yellow metal throughout the year and experience a spurt in demand during festivals when it is their custom to gift Gold to their loved ones. The physical demand in these two markets provides support when Gold prices consolidate as jewellers tend to bargain hunt when Gold prices fall. On the other hand, while Silver receives some of the safe-haven flows, it is a metal that consists of industrial uses; hence the price movements for commodities do affect Silver too. Silver is the world’s best conductor and is therefore used in cars, solar technology, and many electronics.
Despite the differences between the two metals, both metals’ prices share a robust positive correlation.
Throughout the last decade, there have only been a few instances when the correlation between the two metals fell into the negative zone. A positive correlation means that the prices for both metals tend to move in the same direction but to a different extent.
Here is the yearly performance for both metals for the last 10 years:
Lastly, to measure how Gold and Silver perform against each other, the Gold Silver Ratio will be a helpful tool to visualize this relationship.
As shown, the gap between the two precious metals was the narrowest during the week of 17th April 2011 at 31 before widening and eventually topping out at 119 during the peak of Covid-19 pandemic. It was during the pandemic that Gold received strong interest, while Silver did not receive the same extent of safe-haven flows in comparison. Inflation rates have been persistent, as commodities go on a strong rally. Silver has also been catching up with Gold at the same time, hovering near 75 presently.
Note, as this is a ratio, Gold against Silver, this ratio can go up in 4 scenarios if
- Gold goes up and Silver goes down.
- Gold goes up more than Silver goes up.
- Gold stays stagnant and Silver goes down.
- Gold goes up and Silver stays stagnant.
Vice Versa, the reverse for points 1 to 4 will be true for Gold Silver ratio when it goes down instead.
Investors have to determine which scenario it is that led to the higher or lower ratio and their objective for using this ratio.