To varying degrees, both gold and silver may provide a hedge in a potential economic or market downturn, as well as during sustained periods of rising inflation. Understanding the difference between how the two metals are used, 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:
1) Silver May Be More Tied to the Global Economy: Half of all silver is used in 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 is more sensitive to economic changes than gold, which has limited uses beyond jewelry and investment purposes. When economies take off, demand tends to grow for silver.
2) 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 traders may benefit, such volatility can be challenging when managing portfolio risk.
3) Gold Has Been a More Powerful Diversifier than Silver: Silver can be considered a good portfolio diversifier with moderately weak positive correlation to stocks, bonds and commodities. However, gold is considered a more powerful diversifier. It 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 its industrial uses are fairly limited.
4) Silver Is Currently Cheaper than Gold: Per ounce, silver tends to be cheaper than gold, making it more accessible to small retail investors who wish to own the precious metals as physical assets.
How You Can Invest in Gold and Silver
One of the attractions of gold and silver is that both can be purchased in a variety of investment forms:
- Physical Metals: Unlike stocks and bonds, gold and silver can be purchased 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. Storage and even insurance costs should also be considered.
- Exchange-Traded Funds: ETFs have become a popular way for investors to gain exposure to gold and silver, without having 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.
Connect with your Morgan Stanley Financial Advisor to determine how adding gold or silver to your portfolio might help you achieve your long-term financial goals.
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Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Diversification does not guarantee a profit or protect against loss in a declining financial market.
Physical precious metals are non-regulated products. Precious metals are speculative investments which may experience short-term and long-term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals may not be appropriate for investors who require current income. Precious metals are commodities that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (SIPC) provides certain protection for customers’ cash and securities in the event of a brokerage firm’s bankruptcy, other financial difficulties, or if customers’ assets are missing. SIPC insurance does not apply to precious metals or other commodities.
Investing in commodities entails significant risks. The commodities markets may fluctuate widely based on a variety of factors including changes in supply and demand relationships; governmental programs and policies; national and international political and economic events; war and terrorist events; changes in interest and exchange rates; trading activities in commodities and related contracts; pestilence; weather; technological change; and, the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention
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