For years, investors have turned to both gold and silver because it may provide a hedge in a potential economic or market downturn, as well as during sustained periods of rising inflation. Understanding the different uses of the two metals, their economic sensitivities and technical characteristics can help you determine which metal may benefit your portfolio.
Here are four factors to consider when deciding to invest in gold or silver:
Silver May Be More Tied to the Global Economy
More than half of all silver’s demand comes from heavy industry and high technology, including smartphones, tablets, automobile electrical systems, solar-panel cells and many other products and applications, according to the World Silver Survey. As a result, silver tends to be more responsive to economic changes compared to gold. When economies take off, demand tends to grow for silver.
Silver Is More Volatile than Gold
The volatility in silver prices can be two to three times greater than that of gold on a given day. While some traders see this as an opportunity, such volatility can be challenging when managing portfolio risk.
Gold Has Been a More Powerful Diversifier than Silver
While silver may diversify your portfolio with moderately weak positive correlation to stocks, bonds and commodities, gold is considered a more powerful diversifier. The yellow metal has been consistently uncorrelated to stocks and has had very low correlations with other major asset classes—and with good reason: Unlike silver and industrial base metals, gold is less affected by economic declines because it has fewer industrial uses.
Silver Currently Trades at a Lower Price than Gold
Per ounce,silver tends to be less expensive than gold, which recently hit record highs, making silver more accessible to small retail investors who wish to own the precious metals as physical assets. Gains in silver value tend to lag those of gold.
How You Can Invest in Gold and Silver
One of the attractions of these precious metals is that there are many ways to invest in them:
Physical Metals: Unlike stocks and bonds, you can purchase gold and silver as physical assets, as either bars and coins held as part of a Morgan Stanley brokerage account or as American Eagle coins held in a retirement account. The metals would be held by a third-party depository, not Morgan Stanley, though investors can take physical delivery if they want to store it themselves.
Holding bars and coins can have downside, though. For one, investors often pay a premium over the metal spot price on gold and silver coins because of manufacturing and distribution markups. You should also consider storage and even insurance costs.
Exchange-Traded Funds: ETFs have become a popular way for investors to gain exposure to gold and silver, without the responsibility of storing a physical asset. You can buy shares and keep them in a traditional brokerage account. The fund’s operator is responsible for handling the costs of holding a physical supply of gold or silver and charging an expense ratio. But investing in an ETF doesn’t give investors access to the underlying metals. Also, some precious-metal ETFs are taxed as collectibles and don’t benefit from lower long-term capital gains rates.
Mining Stocks and Funds: Some investors see opportunity in owning shares of companies that mine for gold and silver, or mutual funds that hold portfolios of these miners.
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