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Gold vs. Silver for Investing: Weighing the Pros & Cons
Gold and silver are two precious metals that are often utilized by trading accounts due to their unique features. However, both gold and silver offer their own potential risks as well.
Published November 20, 2024.
In this article
Historical Performance and Notable Price Movements of Gold and Silver
Key Factors Driving Gold and Silver Demand
Side-by-Side Comparison of Gold and Silver
Gold vs. Silver: A Detailed Analysis of Risk-Return Profiles
Show More
When considering precious metals for investment, gold and silver are two of the most popular choices. Both offer a hedge against inflation and economic uncertainty, but they come with distinct characteristics that could impact a trader's trading plan.
Understanding the strengths and weaknesses of each metal is crucial for making an informed decision that aligns with the trader's financial goals.
Note: Fortrade offers the ability to trade the price changes of gold and silver with CFDs and NOT to buy/sell ownership of gold and silver stocks, bars, or coins. All the information in this blog is purely educational and should not be considered as advice.
» Interested in gold and silver? See our list of CFDs on other precious metals
Historical Performance and Notable Price Movements of Gold and Silver
Gold
In recent decades, the value of gold (XAU) has increased significantly, often due to economic uncertainties and inflation. Gold was around $300 per ounce in the early 2000s, surged to over $1,900 in 2011 during the financial crisis, dipped below $1,100 in 2015, and reached new highs above $2,000 in 2020 during the COVID-19 pandemic.
Gold's price movements often coincide with economic crises and concerns about inflation, making it a popular potential hedge against uncertainty.
» Learn more: Understanding XAU/USD
Silver
Silver has been highly volatile. In 2001, it was around $4 per ounce, reaching nearly $50 in 2011 due to economic uncertainties and industrial demand. Unlike gold, silver's dual role as a precious metal and industrial commodity leads to more significant price swings.
It's volatility is influenced by monetary and industrial uses, economic uncertainty, increased industrial demand, the COVID-19 pandemic, supply disruptions, changes in mining output, and shifts in investor sentiment.
» Learn about other commodities in our guide to CFDs on agricultural commodities
Key Factors Driving Gold and Silver Demand
Gold
- Economic uncertainty: Gold is viewed as a safe-haven instrument, making it relatively stable.
- Inflation hedge: Historically, gold has maintained its value when paper currencies and paper trading accounts devalue.
- Central bank policies: Central banks hold significant gold reserves and may increase them during economic downturns or currency diversification, impacting global demand and prices.
- Geopolitical tensions: Gold is seen as a secure investment. This fact could increase its demand in cases of political instability.
» Learn how geopolitical tensions influence market volatility
In 2020, global gold production was about 3,200 metric tons, with reserves estimated at around 53,000 metric tons. Major producers include China, Australia, and Russia, with the U.S. holding the largest reserves at over 8,000 metric tons.
Potential Risks
- Storage incurs additional costs
- Does not generate income such as dividends or interest
» Confused about dividends? Here are some examples of oil dividend stocks to help you understand
Silver
- Industrial use: Silver is used in various industrial applications such as electronics, solar panels, and medical devices.
- Economic recovery: Increased manufacturing and technological innovations spur silver demand.
- Investment demand: Investors view silver as a lower-cost alternative to gold for hedging against market volatility.
- Renewable energy: Silver is used in photovoltaic cells, which are necessary in the solar power industry.
» Discover more tech innovations with these examples of tech penny stocks
In 2020, global silver production was approximately 25,000 metric tons, and reserves were around 560,000 metric tons. Mexico, Peru, and China are among the major producers of silver. The supply of silver is more volatile due to its industrial demand and its dual role in both investment and industrial applications.
Advantages of Silver
- Industrial applications drive demand and increase value
- Lower-cost entry point compared to gold
- Price volatility offers potential short-term gains
Disadvantages of Silver
- More volatile than gold
- Storage incurs additional costs
» You should know these pros and cons of trading silver CFDs
Side-by-Side Comparison of Gold and Silver
| Feature | Gold | Silver |
|---|---|---|
| Durability | Gold is durable and resistant to tarnish and corrosion, making it a potential long-term store of value. Its physical properties ensure it maintains its lustre and integrity over centuries. This is why it has been historically used for coins, jewellery, and as a monetary standard. | Silver is highly reactive, especially with sulphur, making it prone to tarnishing and corrosion. Despite this, it is durable for industrial use and investments, although it requires more maintenance to preserve its appearance compared to gold. |
| Liquidity | Gold has high liquidity and can be easily bought and sold in global markets. It is widely accepted as a valuable instrument with extensive trading networks, making it easy for investors to quickly convert gold into cash. | Silver is highly liquid but slightly less so than gold. It could be traded as bullion, coins, or ETFs. However, due to its lower price per ounce, larger quantities may need to be traded to achieve equivalent value, which could complicate transactions. |
| Industrial Applications | Gold is primarily used in electronics, dentistry, and aerospace due to its conductivity and corrosion resistance. Its main demand comes from the jewellery and investment sectors. | Silver is essential in electronics, solar panels, medical devices, and photography due to its high thermal and electrical conductivity. Its demand from both industrial and investment sectors often leads to price volatility. |
| Investment Appeal | Gold is a safe-haven investment during economic uncertainty due to its historical value and protection against inflation, making it a key part of many investment portfolios. | Silver is attractive for investment and industrial demand, offering a lower-cost entry point for investors compared to gold. Its price tends to be more volatile, providing possibilities for higher short-term gains but also higher risk. |
» Here are some unique strategies to keep trading during flat markets
Popular Investment Forms for Gold and Silver
- Coins: Coins are highly liquid as they are a form of direct cash that possibility for ownership, which could increase value due to collectability while also being negatively affected by inflation. However, this comes with higher premiums compared to bars and carries additional costs due to storage.
- Bars: Offer lower premiums compared to coins with flexibility in investment amounts due to availability in various sizes. Like coins, bars also incur storage costs but are less liquid as they require a brokerage or merchant that is willing to purchase gold and silver bars.
- Mutual funds/ETFs: These are investment funds that track the price of gold without requiring physical storage or ownership. They are generally easily traded on stock exchanges and offer lower costs than physical silver and gold. However, they may not perfectly track silver prices and are highly subjected to market risks.
- Mining shares: This offers the chance to invest in gold and silver indirectly by backing the performance of companies that mine and produce silver and gold. They offer the possibility for dividends, but any potential profit is tied to the performance of mining companies regardless of the price of gold and thus has potentially higher volatility.
- CFDs and other derivatives: Silver and gold CFDs (contracts for difference) are financial instruments that allow traders to speculate on the price of gold and silver without owning the physical metal. They offer higher leverage and short-selling (the ability to potentially profit if the price drops) and could be traded often. However, leverage comes with added risk as it can also amplify your potential losses and spreads could also impact potential profits.
» Not sure which is for you? Here are the differences between CFDs and ETFs
Gold vs. Silver: A Detailed Analysis of Risk-Return Profiles
Gold
Gold is known for its stability and safe-haven status. It has historically provided moderate returns, often increasing in value during economic uncertainty and inflation.
However, its prices could be volatile in the short term due to currency fluctuations and geopolitical events. Despite this, gold tends to maintain its value over the long term, making it a reliable store of wealth.
» Wondering if USD is backed by gold?
The lack of income generation is a downside, but its diversification potential and low correlation with other instruments enhance its appeal.
Gold has a relatively safe risk-return profile. Investors consider gold a hedge against economic downturns and inflation, making it a strategic addition to a balanced portfolio, especially for risk-averse investors seeking to preserve capital.
» Interested in learning how to trade gold as a beginner?
Silver
Silver is more volatile than gold because it is both an industrial and a precious metal. Its prices are affected by industrial demand, economic cycles, and technological advancements.
From 1971 to 2021, silver's average annual return was about 6.5%, slightly lower than gold but with greater fluctuations. Due to strong industrial demand and investment speculation, silver surged to nearly $50 per ounce in 2011.
Silver has a higher risk-return profile. Investors are drawn to silver for its potential high returns and industrial growth prospects but should be prepared for greater price volatility and greater risk.
Some investors consider silver as a complement to other stable investments, balancing risk and return in portfolios.
» Stay up to date with geopolitical events by learning to use an economic calendar
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Gold vs. Silver: Tax Implications of Investing
In Europe, investment gold and silver like bullion coins and bars is usually exempt from VAT. However, capital gains tax (CGT) may apply when selling precious metals for a potential profit.
In the UK, gold investments held for over a year may be subject to CGT. Silver investments are typically subject to VAT, generally ranging from 20% to 25%, and are also subject to CGT when sold for a profit.
Insights to Mitigate Risks When Investing in Gold and Silver
Diversification: This involves spreading investments across various instrument classes, including gold, silver, stocks, and bonds.
Dollar-cost averaging: This strategy reduces the impact of market volatility by averaging the purchase price over time, smoothing out short-term price variations.
Hedging: Hedging means using financial instruments or derivatives like options or CFDs to take an opposing position in a particular instrument with the intention to offset potential losses, thus hedging against price movements.
» Here are some beginner insights for stock trading
Gold vs. Silver: Making the Right Choice
The most important consideration for investors deciding between gold and silver is their investment goals and risk tolerance. Gold presents an opportunity for stability and acts as a hedge against economic uncertainty, while silver provides higher potential returns but with greater volatility due to its industrial demand.
Understanding personal financial goals and risk is crucial in making an informed choice.
» Ready to start trading? Learn more about opening a Fortrade account
