1. Silver tends to be more sensitive to economic variables, while gold is often more sensitive to monetary variables. Industrial uses make up a large portion of silver demand — roughly 40%. In contrast, gold demand is driven almost exclusively by investment and jewelry demand. Thanks to its strong tie to industry, silver tends to be far more sensitive to economic variables, such as industrial production and manufacturing demand, than gold is.
At the same time, gold tends to have a higher correlation with monetary variables such as real interest rates, inflation and changes in the value of the dollar. For example, based on annual data over the past fifty years, gold prices have had a 0.5 correlation with inflation, while the correlation between silver and inflation is around 0.35. And in earlier posts, I’ve written much about the high correlation between gold’s returns and real interest rates. While the same relationship holds for silver, it is less strong.
Market Realist – The following graph shows the relationship between gold and inflation, and silver and inflation over the years. The relationship between gold and inflation is much stronger than silver and inflation.
2. Silver and gold come from different production sources, which can have an important bearing on their prices. The majority of silver is produced as a by-product of lead, zinc, copper and gold production. As such, there is not as tight a relationship between silver production and silver prices as there is between gold prices and gold production.
Market Realist – The silver market is an extremely small one. According to the Silver Institute, in 2012 the total silver mined worldwide was 787 million ounces. Taking a price of $20 per ounce, that’s only ~$16 billion. On the other hand, according to the U.S. Geological Survey, the amount of gold mined annually is about 2,500 tons with a market value of well over $120 billion.
3. Silver prices can be more volatile than gold prices, partly owing to the silver’s lower ounce value and smaller market size. This volatility can make silver less attractive than gold to some investors from a portfolio construction perspective.
Read on to know where understanding these differences leaves investors
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