Updated on 02/07/17
Diversifying your portfolio with precious metals is a no-brainer.
But to get the most protection from this safe haven asset, it pays to diversify your metals holdings, too. While silver and gold are closely correlated, there are differences you should understand in order to make the best allocations for your individual needs.
Why Buy Silver Bullion?
Silver and gold are closely connected. Both tend to move opposite of the stock market; when stocks slide, metals rally (and vice versa). This is a large part of what makes precious metals a safe bet for hedging a portfolio.
But while gold has been the traditional go-to for investors looking to store wealth in a hard asset, the rise in industrial demand for silver has many seeing its investment potential in a new light.
Today, about 56% of silver is used for things like electronics, solar panels, medical equipment, and other industrial applications—and demand shows no sign of slowing. This, coupled with silver’s accessible entry price, is prompting many investors to buy silver bullion such as sovereign silver coins or silver bars.
Silver may never be valued as highly as gold, but it does deliver some benefits that gold simply can’t.
The Pros of Silver
Here are some others:
- Physical strength
Gold is famous for being a soft metal; you can easily bend, melt, or mold it. Unfortunately, that also means it can easily become damaged from handling. Silver is much heartier. Even if you store some at home, you’re unlikely to nick, scratch, or mar it.
- Industrial demand
As our appetite for new technologies increases, so does the industrial demand for silver. Eventually, a silver shortage due to demand from electronics manufacturers and other industries can send prices skyward. Given silver’s current low price, the profits could be enormous.
While we hope it never comes to this, the fact that silver is a smaller store of wealth makes it easier to trade for daily purchases if paper currency collapses. Buying a tank of gas with a few silver coins would be much easier than with a 1-oz. gold coin.
- Good for smaller investments
If you’re not ready to move a significant sum into metals, making smaller purchases of silver coins to start out can feel more comfortable. If you’re planning to invest under $1,500, you’ll pay a lower premium for silver than if you buy gold bullion.
- Volatility can deliver a fast return
The main goal of precious metals investing is to insure a portfolio against risk, so in general, you should hold onto your metals for years to come. That said, it is possible to earn a profit in the short term when you buy silver bullion. The price of silver is extremely volatile, which can be frustrating at times and favorable at others. Play the market right and you can see a return in a relatively short amount of time.
The Cons of Silver
- Higher premiums than gold
Dealers need a margin to make money, and silver is cheap. Therefore, you can expect to pay a higher markup for silver than you would for gold when making an investment over $1,500.
- Silver is far more volatile than gold
Silver’s short- and long-term price swings can be extreme. Investors must accept silver’s explosive moves if they want to buy silver bullion. But even when you’ve made your peace with market fluctuations, trying to buy on the “right” days can be frustrating.
- Silver requires more room to store
The downside of silver being so inexpensive is that you have to buy much more of it than if you were to buy gold bullion. Because all that silver takes up more space, you can expect to pay higher storage fees. If you don’t store your silver in a professional vault, moving and storing it yourself can be cumbersome.
- Silver's performance is tied to global growth
Because more than half of the world’s mined silver is used in industry, silver demand (and therefore price) is tied to global growth. If manufacturing slows, so could the demand for silver—making it more highly correlated with stocks than gold. It’s still a reliable safe haven asset, but this is one reason why investors should buy gold bullion in addition to silver.
Why Buy Gold Bullion?
As noted above, silver is more closely correlated to stocks because of its role in the industry, so your precious metals portfolio can benefit from a diversification into gold.
In fact, the World Gold Council recently found that gold’s correlation to stocks actually drops during a recession.
This means that, historically, gold will more often than not move in the opposite direction of stocks during periods of recession. And since stocks typically decline, gold is likely to rise.
Notice what happens to gold’s correlation to other asset classes when the economy moves from economic expansion to contraction (data from 1987 through 2015)…
But that’s not the only reason to buy gold bullion. Gold has intrinsic financial traits and offers a level of wealth protection unmatched by any other asset.
Look at the central banks, which have gone from selling off gold to buying and stockpiling it en masse in recent years. Their reversal only proves the perilous state of global monetary systems and shows the protection owning gold bullion can provide.
The Pros of Gold
- Concentration of value
A little bit of gold is worth a lot; you can hold $50,000 of gold in the palm of your hand. This makes gold bullion much more portable, easier to transport, and less expensive to store than the same dollar amount of silver.
- Gold is durable
You can buy gold bullion today, and in 100 years it will not have rusted, tarnished, or corroded, nor will it disintegrate in harsh conditions.
- The gold price is relatively stable
There are times when the gold price quickly rises or drops, but overall, the price of gold is stable—especially compared to silver. And despite short-term movements, the price of gold has pushed steadily higher for decades.
- Gold is extremely liquid
Both silver and gold are highly liquid assets, but overall, gold is more highly valued (both literally and in its perception among investors) so it has a slight edge in the liquidity department. You’ll always be able to find someone who wants to buy gold bullion.
- Gold has a stronger investment demand
Despite its use in industrial applications, silver still can’t touch gold when it comes to demand from central banks and individual investors. Whereas a recession can slow the demand for industrial silver, gold remains recession-proof. In fact, the demand for gold only grows during times of turmoil.
The Cons of Gold
- Gold is a negative-yield investment
There are few commercial applications for gold. And it doesn’t produce dividends. It also incurs the costs of insurance and storage. We believe this con pales in comparison to the benefits when you buy gold bullion, but it is something investors should be aware of.
- Gold is expensive
At $1,000+ an ounce, gold is pricey. Not everyone can immediately pony up the cash for a 10 oz. bar (or even a 1-oz. bar). Fortunately, it is possible to find a dealer that facilitates regular purchases of metal in smaller denominations then converts it into your own fully allocated bar once you have an equivalent amount of metal.
- Gold is not ideal for making everyday purchases
If fiat currencies were to collapse and you needed to use your gold to pay for goods and services, a 1 oz. coin worth roughly $1,000 (likely much more in a catastrophe scenario) is less than ideal. You can buy fractional coins to offset this risk, but you’ll pay higher premiums for them.
The Best Time to Buy Silver Bullion or Gold
While it can be argued that it is always a good time to buy silver or gold bullion, the market reality is that prices do fluctuate to the benefit of some investors and the detriment of others.
One of the biggest hindrances to growing an allocation to precious metals is that many individuals live and die by the week’s price chart and never wind up making a move, always waiting for “the bottom.”
Don’t chase the market. Both silver and gold have seasonal patterns, and knowing these seasonal trends can provide reliable market insight.
Silver prices climb higher from January through May and sink in the summer and fall. Whether silver will gain or lose on any given day is never a sure thing, but investors typically get better value in the second half of the year.
Gold trends high in January and September. August and October also see gold performing well. Prices tend to dip in April, June, and July. But March is historically the worst performing month for gold—and the best time to buy if you’re looking to get into the market.
Of course, one of the easiest ways to buy bullion is to dollar cost average into your position. That means, committing to making regular incremental purchases—market volatility be damned.
In the end, the average price you pay for your holdings can be on par with or even near the low end of silver or gold’s trading range at the time.
Silver vs. Gold in an IRA
A precious metals IRA makes it easy to diversify your nest egg with the security of physical precious metals.
In five of the last seven recessions, gold moved higher. And three of those times, it rose double digits. Here’s proof. Notice how gold has performed.
Anyone with a significant amount of gold doesn’t just stand to survive the next recession—they can prosper during it.
And because gold is immune from the corrosive effects of inflation, your gold will always retain its purchasing power. Bottom line: if you buy gold bullion for your IRA, you’ve made a solid, long-term investment.
- Buy gold for its stability and resilience.
- Gold is recession-proof—in fact, it is usually positive during recessions.
- Gold preserves your purchasing power in the future.
The downside: gold is better for preserving wealth than growing it. The gold in your retirement account pays no interest or dividends.
Silver can also benefit your retirement savings.
There’s been steady growth of silver production in the last 50 years, but it’s not enough to satisfy growing industrial demand. Another decade or two of this kind of growth will push prices much higher—and make the silver bullion in your retirement account that much more valuable. For now, silver remains an affordable alternative or complement to gold.
- Buy silver while demand still allows (a 2:1 gold to silver ratio is the prevailing recommendation).
- Silver’s undervaluation relative to gold could mean big moves in the future.
- Silver offers investment properties that gold does not. It delivers the safety of a hard asset with the potential for significant returns.
The downside: silver comes with a little more risk than gold because of its ties to industry. If manufacturing drops off, silver will stagnate.
Holding both gold and silver in your IRA will ensure your wealth can never evaporate and set you up for potential profit for years down the road.
Arguing about whether to buy gold or silver to protect your financial future is imprudent. To truly hedge your portfolio against all kinds of risk, a fully diversified precious metals allocation is your best bet.
In the end, whether you invest in silver or buy gold bullion, you’ve made a wise choice. But both silver and gold have their own unique benefits to deliver.