As we edge toward a post-pandemic world, many investors are looking for ways to prepare for future uncertainties. A solution for some may include investing in precious metals, such as gold and silver.
To varying degrees, both metals may provide a hedge in a potential economic and/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.
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. 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.
Historically, both gold and silver have made solid gains when U.S. inflation is rising, in part because the increased costs of goods and services often coincides with a weaker U.S. dollar. Both metals are valued in U.S. dollars, so when the dollar falls in value, gold and silver typically rise because they become less expensive to buy using other currencies. Given greater industrial demand, silver tends to rise more than gold with rising inflation and a falling dollar.
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. “That volatility can translate to larger short-term gains, but it often carries the risk of greater downside,” says Nicholas Thompson, who manages Morgan Stanley’s physical precious metals offering for Wealth Management clients.
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.
Silver is much cheaper than gold, making it more accessible to small retail investors. For those who are just starting to build their portfolios, the cost of silver may make it a better investment choice.
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.
“Owning gold or silver in physical form can provide satisfaction to investors who want to own something tangible that they can take possession of,” says Thompson.
Holding bars and coins can have downside. 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 longterm 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.