Gold vs Silver: what to buy?
Investing in precious metals is a big commitment, and it can be difficult to know which one to choose. Both Gold and Silver have their own benefits and drawbacks.
Why invest in Gold?
VAT free
Unlike silver, gold bullion is exempt from VAT. This means you don’t pay extra tax when buying gold, making it easier to profit. Silver prices must rise by about 20% to cover VAT before earning a return, but gold’s VAT-free status can lead to quicker and higher gains, especially when selling.
Storage
Gold is a highly practical precious metal for storage due to its exceptional value density. Because gold is denser than silver, a smaller volume of gold can hold a significantly higher value compared to silver, making it easier and more efficient to store.
For example, a one-kilogram gold bar is currently worth around £80,000. To invest an equivalent amount in silver, you would need approximately 20 bars weighing 5 kilograms each—or even more if using smaller denominations—resulting in much greater storage requirements.
This makes gold an ideal choice for investors seeking a valuable, space-efficient, and secure store of wealth.
Independence from industrial demand
Gold and silver prices are generally unaffected by stock market performance. While silver often follows similar trends to gold, its price is significantly influenced by industrial demand, making it much more volatile. In contrast, gold is a more stable and predictable investment due to its limited industrial use. This independence makes gold a superior choice for preserving the value of your portfolio, especially during periods of economic uncertainty.
Superior purchasing power
Gold is a much safer asset for long-term investment because it preserves its value over time, even during price fluctuations. Analysing the price trends of gold and silver since 2011 reveals that gold’s value declined significantly less—around 23% over five years, compared to silver’s 59% drop. Gold tends to remain far more stable during periods of inflation due to its limited global supply, making it a reliable store of wealth.
Why invest in Silver?
More affordable
Silver offers many of the benefits of gold but at a much lower cost. This is why silver is often called the “poor man’s gold.” It is ideal for investors with a smaller budget, whereas gold is generally better suited for larger purchases. Additionally, silver’s greater affordability makes it an excellent choice for gifts.
Higher volatility
Silver is more volatile than gold, meaning its price experiences larger fluctuations. During bull markets, silver’s price tends to rise more sharply than gold, while in bear markets, it usually falls more steeply. This increased volatility offers the potential for higher returns but also requires investors to be more attentive and responsive when deciding to buy or sell. For those comfortable with these risks and able to invest near the start of an upward market trend, silver can significantly enhance portfolio performance.
Selling benefits
Silver offers greater flexibility and practicality for everyday financial needs compared to gold. As you are able to sell smaller amounts of silver, such as individual coins, it allows you to cover minor expenses without having to liquidate a full ounce of gold. This makes silver more convenient for smaller purchases or unexpected costs. For these reasons, incorporating silver into a precious metal portfolio can enhance liquidity and provide a useful complement to gold.
More industrial uses
Silver is unique among precious metals due to its significant industrial demand, with approximately 56% of its consumption used in various industries compared to just 12% for gold. It plays a crucial role in electronics, medical equipment, batteries, solar panels, and data storage media. Silver demand tends to rise during periods of economic growth, driven by increased industrial activity, and weakens during recessions or deflation. As a result, its price is more sensitive to global economic cycles than gold, which is primarily valued as a store of wealth. The state of the global economy therefore has a greater impact on silver’s demand and price fluctuations.
The Gold / Silver ratio
It is well-known that gold is significantly more expensive than silver. However, the price difference between the two metals is not fixed. To quantify this relationship, investors use the gold-silver ratio.
The gold-silver ratio represents the proportional value between gold and silver—or, in simpler terms, it shows how many ounces of silver can be purchased with one ounce of gold.
Because the prices of both metals fluctuate in real time, the gold-silver ratio changes regularly.
Understanding the Ratio’s Behaviour
While not guaranteed, the common theory suggests:
- During a bear market, the ratio tends to rise, meaning gold appreciates relative to silver.
- During a bull market, the ratio typically falls, indicating gold becomes less valuable relative to silver.
Historical Example: 2011–2016
- In 2011, both gold and silver prices peaked. At that time, the ratio was about 31:1, meaning 1 ounce of gold could buy around 31 ounces of silver.
- By 2016, the price of silver had dropped sharply—losing nearly two-thirds of its 2011 value—pushing the ratio up to approximately 88:1. Now, 1 ounce of gold could buy 80 ounces of silver.
Supply, Demand, and Investment Implications
There is approximately 16 times more silver in the Earth’s crust than gold, suggesting the natural or “intrinsic” ratio could be close to 16:1. The fact that the current ratio deviates so far from this baseline may indicate that silver is undervalued, potentially offering an attractive investment opportunity.
Silver’s price tends to fluctuate more than gold’s because it has many industrial applications, unlike gold, which is primarily used as a store of value. This volatility also makes silver a compelling safe-haven asset.
Portfolio Strategy
For investors, holding both gold and silver in a bullion portfolio can provide diversification and hedge against various market conditions. The gold-silver ratio should not be used to determine which metal is outright “better” as an investment. Instead, it can guide timing decisions—helping investors decide when to favour one metal over the other based on relative value.
