Hello investors, As we know that silver has delivered very good returns in recent years. We also read that its industrial use is on the rise.
Many times, if you want to invest today, gold is a better option. What is the best option in terms of the risk-reward ratio between silver and equity?
And especially, should we focus on silver? And if yes, what is the best way to invest in silver? We will know all this and much more in this blog.
Now, consider gold and silver, particularly when focusing on these two. Four major factors determine when silver is more attractive than gold and when gold is more beautiful than silver.
Price Ratio Comparison of Gold and Silver
Historically, 50 to 65 grams of gold, equivalent to 1 gram of gold, is valued at the price of 50 to 65 grams of silver.
Read carefully — 1 gram of gold comes in exchange for 50 to 65 grams of silver.
This has been the historical average relation of these two commodities.
That is, if you receive 1 gram of gold in exchange for less than 50 grams of silver, it means that you must accept that silver is currently expensive.
And if you have to pay more than 65 grams of silver in exchange for 1 gram of gold, then you have to accept that silver is cheaper in comparison to gold right now.
So, what is the current ratio?
Currently, approximately 84 grams of silver are required to obtain 1 gram of gold.
That is, if I look at this historical benchmark, then silver seems cheaper to us than this particular benchmark — because 1 gram of gold is equivalent to 84 grams.
However, we should not invest in silver solely based on one metric.
This is part of the process. This is only one metric out of the four metrics.
This one metric is in favour of silver today — but what about the other metrics?
So, let’s move ahead.
Returns: Short-Term vs Long Term
If we compare the five-year comparison of gold and silver.
Returns — 10-year returns and 30+ year returns.
Silver has outperformed over the past five years, but in the longer term — whether 10 years or 34 years — gold has consistently outperformed silver since we obtained the benchmark data.
Now, this is about returns, specifically returns — in which silver has performed well over the last five years.
Broader Comparison: Including Equity
So, is silver better recently? Let’s do a broader comparison — not just of returns but also of risk-adjusted returns.
And let’s compare it with equity as well.
So, we took three metrics:
- We took the returns of the last 34 years – In this, equity is the best, gold is the second best, and silver is the worst.
- Then we tried to look at the volatility– In this, equity and silver are equal. Gold is the best.
- Then we tried to look at the drawdown, how much can it come down from its peak at a particular time or not– How much of your capital is at risk, at least temporarily? In this also, equity and silver are almost similar. Gold is better.
Summary So Far
What are we getting to know from this?
We are getting to know from this that in the long term:
The volatility in silver is equal to equity
Drawdown, i.e. capital at risk in the short and medium term, is equal to equity
But the returns are not as much as equity
So you are taking a risk on equity, and you are not getting those returns.
Gold is a good hedge; it serves as a safety mechanism to diversify your capital from equity.
If equity does not perform well, then gold remains stable, with comparatively less volatility, and its returns easily beat inflation.
So this is the speciality of gold — that it truly protects your money from volatility and also gives good returns.
So, in this metric, gold outperforms silver.
So, the score so far is one and gold versus silver.
Now, let’s move ahead.
Real World Usage
Now we come to the usage — which of these two products has more real-world usage in the world?
First, we come to silver.
Silver has numerous applications in various industries — and this demand is increasing.
Silver is becoming increasingly important for various industries — including EVs, solar panels, and electrical components — and its use is increasing incrementally.
So that’s it — the currency is devaluing all the assets, land prices are falling, and there is no trust in bitcoins.
When there is uncertainty everywhere — it is the safest place where you can park your capital.
So, its real-world usage may not be equal to silver, but its purpose is different.
It is a uniform, globally accepted store of value.
So, in this, I would call it a tie — because the purpose and use of both are very different.
Diversification Power
Now, coming to the fourth metric.
Now we see — when we think about gold and silver, we want to invest in it for diversification.
I have invested a significant amount in real estate, the stock market, and bonds — but this is different from investing in the country.
If there is political instability in the country or the economy is not performing well, I need a safer store of value.
I want to keep my money safe in a diversified way.
Gold vs Silver as a Diversifier
What is the comparison between gold and silver in this regard?
So see — as we saw at the time of the second point:
- The silver volatility is similar to the Indian stock market
- Its drawdown is also similar to the Indian stock market
- And the returns are low
Therefore, it can also be a coincidence for silver, but the movement of silver is highly correlated with the Indian stock market.
The returns are less than that, but the fluctuations are similar to those of the Indian stock market.
Why does this happen?
Because in an increasingly globalized world, if the price of silver is going up and down based on industrial demand — then if the industrial demand in India is less, India is now the fourth largest economy in the world — so if the industrial demand for silver in India is more or less, then what is happening to that demand?
As a result, you will notice a stronger correlation between the equity market and silver than between gold and the equity market.
I will not claim that silver will behave similarly to the equity market, but the pattern is more similar to that of the equity market than to gold.
In such a situation — now the better diversification instrument is gold — especially when, in the long run, its returns are also better.
Final Take
If it is also less, then if I have to diversify from real estate, bonds, or equities, gold will be a better option. Gold has consistently proven itself to be a reliable store of value, yielding attractive returns over time.