Last Updated on October 28, 2024
[Disclaimer: I own both physical silver and physical gold as well as silver and gold stocks. This is not investment advice and is provided for information only. This considers the economic case for silver over gold and is not a recommendation to buy either. Do your own research and consult a financial advisor.]
The main reason why you might want to buy silver over gold is because silver is a better speculation and outperforms gold in a bull market.
As a long term store of value, gold is vastly superior.
But as a short to medium term speculation, when timed right, silver can offer outsized returns.
The silver market is much smaller than the gold market and has less existing above ground stock. It also has industrial use which gold does not.
That means that it doesn’t take as much money to move the silver market.
When a gold bull market takes off, silver tends to follow. And when the generalist investor gets an appetite for silver, the market explodes higher.
However, you need to be cautious that silver also falls further during a bear market and is much more volatile than gold.
But you can use the volatility to your advantage by buying low and selling high.
The Size of the Silver Market
The market cap of silver is approximately $1.193 trillion US Dollars.
Compare that to the market cap of gold which is approximately $12.12 trillion US Dollars.
The larger the market cap, the more new money can be absorbed without a huge change in price.
The smaller the market cap, the less new money is needed to significantly shift the price.
Silver’s Performance In Past Bull Markets
Gold tends to lead in a precious metals bull market.
That is because gold is a pure monetary and safety play, whereas silver is both a monetary and an industrial metal.
Sometimes silver’s price actions behaves like a monetary metal and sometimes its price action behaves like an industrial commodity.
However, once the precious metals bull market gets underway, silver typically follows gold higher and its price action starts to reflect its status as a monetary metal.
Precious metals bull markets normally coincide with bear markets elsewhere and investors seek safety and protection of purchasing power in the monetary metals.
The smaller, more volatile nature of the silver market pushes the price much higher on a percentage basis than what gold does.
The Gold/Silver Ratio
One excellent metric to help you determine when it is more advantageous to buy silver over gold is the gold/silver ratio.
The gold/silver ratio tells you how many ounces of silver it takes to buy one ounce of gold.
When the ratio is high, it takes more ounces of silver to buy an ounce of gold. It means silver is cheap relative to gold.
When the ratio is low, it takes less ounces of silver to buy an ounce of gold and it means silver is more expensive relative to gold.
Historically the gold/silver ratio has often been fixed by governments, such as the 15:1 instituted by the US government in the Coinage Act of 1792.
However, that was when the nation was on a bimetallic monetary standard.
Since the 1870s when silver was demonetised with the adoption of the gold standard, the ratio has become much higher.
In the 20th century the ratio averaged 47:1 and in the 21st century the ratio has tended to range between 50:1 and 80:1.
Moves outside of this range have signalled either a good time to sell silver or a good time to buy.
When silver peaked in 2011 the ratio fell to around 35:1, which for recent history means incredibly overvalued silver.
When silver crashed during the initial Covid scare in 2020 the ratio reached almost 105:1, representing an incredible opportunity to buy cheap silver.
Conclusion
If you value safety and preservation over capital over a long time then it is better to buy gold than silver.
But if the gold/silver ratio is high, if silver is cheap and we are on the cusp of a precious metals bull market, then silver offers an excellent speculative opportunity.
During a precious metals bull market silver typically outperforms gold by a significant margin.
Just make sure you dollar cost average out near the top. The last thing you want is to be holding a bag of silver during a bear market.
Image Credits
Silver Coins by Zlataky on Unsplash
Gold to Silver Ratio by Long Term Trends
