ALBAWABA - When discussing commodity trading, it means buying and selling raw materials instead of finished products (like houses) or financial assets (like stocks and bonds).
Commodities are also assets, including corn, coffee, and lumber. One common form of commodity trading is investing in precious metals, namely gold and silver.
However, in terms of investment, gold and silver have very different characteristics and uses in your portfolio.
Gold VS Silver: Utility Governs
The key differentiator in investing in precious metals compared to other commodities is utility. For most other commodities, investors gauge value based on supply and consumer demand.
If you want to invest in coffee beans, for example, you can judge prices by the amount of coffee people are currently consuming, shifting tastes, and so on.
Precious metals differ in that they have relatively low commercial utility. Compared to other metals, there are relatively few consumers or industrial uses for assets like gold and silver.
However, silver has far more industrial and commercial applications than gold. Nearly half of the silver bought and sold on the market is used in business activities, ranging from dental work to electronics.
In contrast, gold has very few commercial uses outside of jewelry.
This distinction provides investors with a basis to assess and predict the price movements of silver. Decisions can be based on factors like industry demand and the global economic climate.
This is why billionaire American investor Warren Buffett has mentioned preferring silver over gold due to silver's diverse industrial uses.
Gold VS Silver: Costs and Volatility
Recently, silver has been trading around $25.77 per ounce, while gold has been trading at around $1960 per ounce.
Apart from the surrounding trading details for each metal, historically, gold has been much more expensive than silver. This is partially because silver deposits are about 20 times more common than gold deposits, leading to two implications for investors:
Firstly, investing in silver is much easier than investing in gold. You can acquire more silver for less money, meaning investors with less liquidity can more easily obtain silver.
However, as with all financial assets, this can also expose you to potentially larger gains and losses, as low-cost assets tend to be highly volatile.
For instance, at current prices, silver only needs to change in price by about $2.57 per ounce to exhibit a 10% price fluctuation.
On the other hand, if the price of gold changes by $2.57 per ounce, that would represent a change of about 0.0013%, highlighting the increased sensitivity of low-cost assets.
Gold VS Silver: Relationship with Stock Market
Gold tends to move inversely with the stock market; it's known as a "counter-cyclical investment."
This means it tends to rise when mainstream assets fall, and vice versa. Historically, the worse the stock market performs, the more investors flock to gold as a safe haven.
Conversely, during times of prosperity, investors tend to withdraw from gold and allocate funds to assets more closely linked to the broader economy, aiming for higher returns.
For example, a recession is the worst time to sell stocks, but the best time to buy them. Owning a valuable asset like gold to sell during a recession allows you to buy other assets at a lower price without selling your own holdings.
On the contrary, silver tends to move more in line with the overall economy, at least more so than gold.
This is largely due to its similar commercial uses, which make silver more predictable. When the economy slows, industries require less silver for manufacturing, leading to a price decrease.
Gold VS Silver: Which Should You Buy?
There's no objectively "better" investment – it all depends on your market position and financial portfolio.
However, a good rule of thumb is as follows: invest in silver if you're investing in good times, and conversely, invest in gold if you're investing in challenging times.
