Are Gold and Silver Interchangeable As Precious Metals Savings Assets?

Gold and silver have demonstrated a tendency to respond similarly to relevant changes in the economic environment. As the reputed safe havens precious metals are thought by so many to be, gold and silver often strengthen during periods of geopolitical and economic turmoil. This includes occasions when central banks and governments take drastically expansionary measures to help heal ailing economies, which can raise fears of dollar debasement.

For example, many are aware that both gold and silver surged last year as the pandemic morphed into a full-blown economic crisis. The factors that seemed to exert upward pressure on the metals included an abrupt exit from risk assets as well as the initiation of unprecedented dovish monetary and fiscal policy “rescue” measures which raised fears of dollar weakness. 

Similarities in the momentum and direction of both metals certainly go back further than just last year. As the effects of the multi-year 2008 global financial crisis continued to unfold, gold and silver surged together from 2008 to 2011, with gold climbing 160% and silver rising 400%. And since the beginning of the millennium, the two metals have demonstrated the same general upward path, with silver and gold appreciating roughly 450% and 540%, respectively.

But despite such broad similarities in movement dynamics, it’s important for retirement savers to recognize that gold and silver are not the same metal, despite the frequency with which they’re mentioned together in the same breath. As a matter of fact, gold and silver are not related intrinsically at all, even though general perceptions might suggest otherwise.

The reality is that for all their similarities, there also are fundamental differences that distinguish gold and silver from one another as assets. Among the most significant of these are silver’s much-smaller market as well as the white metal’s greater sensitivity to expansionary monetary and fiscal policies. Understanding these differences – and their implications – is important for prospective precious metals buyers, so that they can make the best decision for themselves about whether they should purchase gold, silver – or perhaps both.

Silver’s Smaller Market Means It Can Be More Volatile Than Gold

Although the global supply of silver is much larger than the global supply of gold, silver’s price is roughly 1/70^th that of gold’s. The result is a gold market capitalization that’s roughly ten times greater than silver’s market cap. One of the consequences is a silver market that’s inherently more volatile. This volatility means the price of silver can move more suddenly and with greater velocity than the price of gold over shorter periods. 

Take a look at how that volatility was reflected from April through the first week of August last year, a period during which gold climbed about 28% and silver soared around 53% as economic fallout from the pandemic grew to particularly acute levels.

Toward the outset of the pandemic, when fear and uncertainty prompted an initial wave of selling that spared virtually no asset, you’ll notice silver sank much lower than gold. But when a measure of calm began returning to all markets and precious metals received the message that both the Federal Reserve and the government were all-in on “emergency” initiatives such as unlimited quantitative easing (QE) and unrestrained deficit spending, both metals began a sharp climb.

Indeed, silver’s volatility eventually began working in its favor during this period, as the metal’s performance in July and August last year clearly reveals.

As with anything that’s inherently more volatile, silver’s shorter-term price performance can be more “manic”; its lows potentially can be lower and its highs can be higher. And when silver’s greater volatility is expressed through its unique sensitivity to QE, the result can be a sharp surge in price that leaves gold in its wake.

Silver’s Indispensability as an Industrial Metal Can Make It Especially Sensitive to QE

Like gold, silver is a precious metal that can rise and fall on the basis of its perceived value as a safe-haven asset. But silver has something else going for it that gold does not. As the metal with the highest conductivity of heat and electricity, silver also is an essential industrial material. This means silver has the potential to thrive not only as a risk-off asset but also as an asset prone to strengthen when the economy is the recipient of good news. In combination with its potential for volatility to the upside in select circumstances, this feature can explain the metal’s more dynamic showings at times.

Let’s refer back to the chart for a few minutes. Both gold and silver appeared to respond favorably to the enaction of sharply dovish monetary and fiscal policies during late spring and early summer last year. But why do we see such separation in July and August as silver begins to leave gold behind?

The aforementioned volatility is part of the answer, but not all of the answer. The other part of the answer, in my opinion, is that as the effects of the cash infusions and extra spending made their way through the economy, the outlook for business and industry improved. As it did, the prospects for silver – in terms of its indispensability as an industrial material – improved, as well.

I believe we saw this trend also play out during the years of the 2008 financial crisis. Against the backdrop of massive deficit spending and then-unprecedented QE (quantitative easing), both gold and silver began to strengthen considerably in the latter part of 2008 through 2009 and into 2010. But in late summer 2010 – the first year since the onset of the crisis that saw a positive gross domestic product (GDP) – silver jumped well ahead of gold as stimulus measures finally exerted a positive effect on the business environment and suggested a reinvigorated industrial demand for silver.

Is Silver “Better” Than Gold? Is Gold “Better” Than Silver?

So does silver’s outperformance of gold during recent economic crises suggest it’s “better” than gold as a savings asset? Can one really say that?

If that’s the conclusion you wish to draw, then how do you reconcile it with the fact that over more extended time frames, gold has demonstrated a propensity to appreciate more than silver? For example, you may remember I mentioned earlier that gold has significantly outperformed silver since the beginning of the millennium. Does that suggest it’s gold that’s the superior savings metal?

Speaking for myself, I prefer not to look at buying gold and silver as an “either/or” proposition, which means I have no interest in making a determination about whether gold or silver is the “better” metals asset to own. Rather, I believe each offers potential advantages that could prove beneficial to one’s long-term retirement savings. 

In my view, gold’s larger market, scarcity and worldwide prestige potentially lends it to being a more stable performer over the long term. On the other hand, silver’s smaller market – in combination with its potentially more-sizeable sensitivity to the effects of expansionary monetary and fiscal policies – suggests it could be particularly valuable during periods when such policies are dominant.

It should be clear by now that despite their general similarities, gold and silver are not interchangeable as precious metals savings assets. However, the question that remains to be answered by metals-inclined retirement savers is if they’re better served by gold, silver…or perhaps an allocation to each.