…It’s not unreasonable that gold and silver (along with platinum) are often lumped together in the precious metal basket…but it’s important to distinguish between silver and gold rather than assume that the two metals are interchangeable. Words: 385
So writes Russ Koesterich (www.BlackRockBlog.com) in edited excerpts from his original article* entitled Three Reasons Silver is Not The Same as Gold.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Koesterich goes on to say in further edited, and in some instances paraphrased, excerpts:
While silver shares many characteristics with gold, here are three important differences between the metals.
1. Silver tends to be more sensitive to economic variables, while gold is often more sensitive to monetary variables
Industrial uses make up…40% of silver demand…[while,] in contrast, gold demand is driven almost exclusively by investment and jewelry demand. [Given the aforementioned]…silver tends to be far more sensitive to economic variables, such as industrial production and manufacturing demand, than gold is. At the same time, gold tends to have a higher correlation with monetary variables such as real interest rates, inflation and changes in the value of the dollar. For example, based on annual data over the past fifty years, gold prices have had a 0.5 correlation with inflation, while the correlation between silver and inflation is around 0.35. [In addition,] there is a high correlation between gold’s returns and real interest rates. While the same relationship holds for silver, it is less strong.
2. Silver and gold come from different production sources, which can have an important bearing on their prices.
The majority of silver is produced as a by-product of lead, zinc, copper and gold production. As such, there is not as tight a relationship between silver production and silver prices as there is between gold prices and gold production.
3. Silver prices can be more volatile than gold prices, partly owing to silver’s lower ounce value and smaller market size. This volatility can make silver less attractive than gold to some investors from a portfolio construction perspective.
So where does understanding these differences leave investors?
Whether investors should consider exposure to silver or gold, or both, partly depends on why they are allocating to precious metals in the first place.
- Those investors that view their position in precious metals primarily as an inflation hedge may want to consider gold, which, at least historically, has done a better job of hedging portfolios against rising prices.
- Those investors that are looking to play a cyclical rebound in the global economy may want to consider silver because silver prices are likely to benefit more from an uptick in manufacturing.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.blackrockblog.com/2013/07/31/3-reasons-silver-gold/ (©2010-2013 BlackRock. All rights reserved.)
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