Silver: The Best Ways To Invest
Its Relationship To Gold, Stocks & Treasuries
I received a subscriber comment following my recent Twitter space with Alasdair Macleod, who is a precious metals expert with Goldmoney. The comment was about silver specifically.
“I am a recent investor and I really enjoyed this week's chat with Alasdair Macleod. He did a great job of explaining what gold and silver really represent, however, I have learned the hard way that the market does not always operate on logic. What is your opinion of the best options for investing in silver? With gold, I own the two big miners and PHYS. I'm curious as to your thoughts about silver.”
While this person doesn’t explicitly state which gold miners he/she owns, it’s probably safe to assume that they are Newmont Mining and Barrick Gold. PHYS is the Sprott Physical Gold Trust, which holds bars at the Royal Canadian Mint.
Gold vs. Silver
It probably helps out to start by discussing the uses, advantages and disadvantages of holding gold and silver. While both are considered precious metals under the broadest of terms, they’re actually very different in their potential applications.
Gold is the more traditional precious metal as most people understand it. Its most common use in everyday life is in jewelry, while its use in an investment portfolio is as a risk hedge. I use the phrase “risk hedge” very purposefully because that’s what history has demonstrated it to be. It’s a common misconception that gold is a downside hedge for bear markets. While it can be that at times, its long-term historical correlation with the S&P 500 is nearly zero. That means two things. First, gold is really an asset class that does its own thing and may or may not work at any given point in time. Second, that lack of correlation makes gold perhaps the ultimate diversifier and risk mitigator.
Silver is different. It can be used as a traditional precious metal as well, but it has far more practical uses as an industrial metal. It’s used in everything from electronics to solar panels to medical devices to electric vehicles. Because of its ties to the materials and industrial sectors, silver prices are far more cyclically sensitive than gold prices. Its correlation to the S&P 500 is closer to 0.3, which means silver prices tend to move similarly to stock prices. It also makes silver much more volatile as an investment. The historical standard deviation of daily returns for silver is roughly twice that of gold. In short, silver will be much more heavily influenced by what’s going on in the financial markets and the global economy.
Gold’s & Silver’s Relationship to Treasury Yields
We’ve long been told that precious metals, gold in particular, and Treasury yields are inversely correlated. The reason is that if Treasury yields are rising, it makes them look more attractive to investors and, thus, they’ll pull money away from gold because it comes with no yield.
While that’s true in a lot of cases, it’s far from a dependable relationship. That’s consistent with the idea that gold really doesn’t correlate with anything over the long-term, but 2024 has been a true outlier. Not in the fact that precious metals and Treasury yields have been inversely correlated, but in how positively correlated they’ve been.
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