Gold vs Silver: Know the best precious metal bet for your investment portfolio

Gold vs Silver: When looking to strengthen an investment portfolio with precious metals, gold and silver are often the top choices. Gold provides reliable growth and security, whereas silver’s wild swings can mean big gains. Deciding between these two metals requires understanding their distinct characteristics, market dynamics, and potential returns.

"While gold offers stability and diversification benefits, silver's higher volatility can lead to greater returns. A balanced approach is essential in today's uncertain economic environment," said Arpit Suri, CA and personal finance expert.

Over the 45 years from December 1978 to June 2024, the gold spot price index (in USD) achieved a compound annual growth rate (CAGR) of 5.27 per cent, according to data by Curvo. This period also saw gold exhibit a standard deviation of 18.00 per cent, indicating the variability in its returns, and a Sharpe ratio of 0.33, which measures risk-adjusted returns.

In comparison, the silver spot price index (in USD) had a CAGR of 3.55 per cent over the same 45-year period. Silver's returns were more volatile, with a standard deviation of 33.23 per cent, and its Sharpe ratio was lower at 0.25. This data highlights that while gold offered steadier growth, silver had higher volatility and slightly lower risk-adjusted returns.

Gold’s consistency vs Silver’s fluctuations

When comparing the average returns of gold and silver spot price indices over various periods, gold has consistently delivered solid performance. In the last year, gold has had an average annualised return of 23.7 per cent with a total return of 23.7 per cent. Over the past five years, gold's average annualised return is 12.0 per cent, leading to a total return of 75.9 per cent. In the last decade, gold has provided an average annualised return of 8.5 per cent, resulting in a total return of 126.2 per cent.

Silver, on the other hand, has shown more volatile performance. In the last year, silver's average annualised return was 30.7 per cent, with a total return of 30.7 per cent. Over the past five years, silver's average annualised return is 14.1 per cent, leading to a total return of 93.0 per cent. In the last decade, silver's average annualised return drops to 3.5 per cent, with a total return of 40.7 per cent.

Silver’s economic sensitivity

Silver stands out as an industrial commodity. Around half of all silver mined is used in industries such as electronics, automobiles, and renewable energy technologies like solar panels. This makes silver prices closely tied to global economic performance, with demand rising during economic expansions and falling during downturns.

Assessing risk and reward

Silver is known for its greater price volatility compared to gold, often experiencing sharper swings in response to market changes. While this can present opportunities for high returns, it also means higher risk for investors seeking stability.

Gold's diversification advantage

Gold is valued for its status as a safe haven asset and its role in diversifying portfolios. Unlike silver, which is influenced by industrial demand, gold maintains its value across economic cycles. This makes gold a reliable component in diversified investment portfolios due to its low correlation with traditional assets like stocks and bonds.

Accessibility and affordability

Silver is more accessible than gold due to its lower price per ounce, making it an attractive option for retail investors. However, the higher volume needed for storage can pose logistical challenges and additional costs.

Liquidity, demand & storage dynamics

Both gold and silver are highly liquid in the market, but gold's broader demand contributes to its higher liquidity. Additionally, silver's tendency to tarnish requires specialised storage, adding to the cost of ownership.

Non-physical metal options

Investors can also gain exposure to gold and silver through Exchange-Traded Funds (ETFs), which offer a convenient way to invest without dealing with physical assets. Investing in mining stocks and funds provides indirect exposure to the precious metals sector and its growth potential.

Future of metal trading

Technological advancements are making precious metals more accessible through innovations like Gold ETFs and silver exchanges. Staying informed about these trends and diversifying investment strategies can help investors capitalise on the appeal of gold and silver.