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Gold vs. Silver: The Reality

Commodities / Gold and Silver 2011 May 18, 2011 - 01:20 PM GMT

By: Dr_Jeff_Lewis


As silver shows its temper tantrum in the form of price volatility, the media’s pundits are coming out in mass to declare that gold is now the better investment.  Their claim is very simple: if silver is going to be so volatile, why should investors own it?

Our answer is even simpler; growth is what makes silver shine. 

Compare and Contrast

In contrast to silver, gold does appear to be a happier purveyor of anti-inflationary dollars.  However, from the top-view, the reality is that gold hasn’t yet given investors a climb equal to that of silver.  Instead, it is a slow mover, a relative non-starter, and traditionally very conservative when compared to other commodities.

To compare gold, the new anti-inflationary investment, against silver is to compare the S&P500 to a single micro-cap equity.  While the S&P500 average has provided for slow, but tangible long-term performance, a single micro-cap stock may provide twice the returns with ten times the volatility. 

It makes perfect sense why financial traditionalists would prefer to own a low-beta security or commodity; low beta investments can be levered to a much greater extent than a high-beta investment. 

Investors should realize that the change in investment recommendations have come with an obvious change in investment philosophy.  Active investors and media pundits have a greater interest in realizing paper profits than does the individual investor who chooses to make small, unleveraged purchases of real, physical bullion. 

On Wall Street, nothing short of exchange-traded funds, an effective derivative, or options on exchange-traded funds, a double dose of speculative derivative plays, will do. 

The Industrial Advantage

Last year, we evaluated why we believe silver to be the preferred investment to gold, and the fundamentals surrounding such a call have not changed.  Certainly, silver has provided better returns and continues to have better upside, despite all the market chatter.

The true advantage of silver isn’t that it is more volatile, or that it is a smaller market, or even that it is less expensive.  No, the real advantage is in industry.  Most silver investors, despite having a very bearish sentiment toward the US economy, know that the world can grow in light of the United States, and in places as far off as China and India, economic growth is tallying up in the double digits, even as the US economy stagnates.

In looking at both metals for their industrial exposure, it becomes very clear which one shines brighter.   Gold, which is consumed mostly in jewelry, provides very little outlet for consumption, as Cash4Gold proved there are plenty of people willing to cash in their valuables.  Gold which is not easily recycled—gold used in dentistry products, the manufacture of electronic products—represents roughly 10% of annual consumption. 

Silver is used primarily in industry, particularly in the rising field of RFID technology, which will experience double digit growth rates in a log scale only the money supply chart could match.  Jewelry consumes only very little of total silver consumption—less than 30% of silver is used in jewelry—and thus silver, holding all else constant, is likely to shrink in supply far faster than gold will.

While both are inflation hedges, there is only one monetary metal that provides opportunity to profit on inflation, a breakdown of the dollar, or even a complete revival of the American economy, and that metal is, more so than gold, silver. 

To the individual investor who cares very little about the day to day movements of the market but instead the long-term performance of a quality investment, silver makes a perfect investment vehicle on recovery and economic calamity.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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