Gold vs. Silver

Now that we’ve fully covered the general topic of precious metals as investments, it’s time to get a little more specific. When we refer to “precious metals”, we are primarily talking about the two metals we sell here at JMBullion.com: gold and silver.

Gold and silver vary from each other in quite a few ways, so we wrote this article to specify all the differences and highlight the advantages and disadvantages of each metal. The topic we will be covering for gold and silver includes each metal’s price and the price ratio between the two, each metal’s liquidity, storage of the metals, and the markup for buying each metal.

The Spot Prices of Gold and Silver

Gold and silver prices move significantly year to year, so the best way to get a general gauge of the prices of these metals is to look at semi long-term charts. Below we have the gold and silver price charts dating from January 2000 to the time of this writing (February 15, 2012):

(Chart courtesy of Kitco.com)

As you can see above, gold has ranged from ~$265/ounce to ~$1,850/ounce over the past 12 years, with a generally upward trend over the time period.

(Chart courtesy of Kitco.com)

Silver has followed a fairly similar pattern, ranging from ~$5/ounce to ~$45/ounce over the past 12 years, with a generally upward trend over the time period.

What we can take from the above charts is that gold, as of late, has been significantly more expensive than silver. This price relationship between gold and silver exists despite the fact that there is actually much more above-ground gold in existence than above-ground silver; current estimates place above-ground gold at ~5 billion ounces and above-ground silver at ~450 million ounces (http://silverstockreport.com/essays/Silver_vs_Gold.html).

The commonly accepted reasons why gold is more expensive than silver, despite its relative abundance, are that gold is more widely used in jewelry, gold is seen as more of an “alternative currency” than silver, and gold is in higher demand by both central banks and individual investors than silver.

Gold/Silver Ratio

The ratio between the gold and silver spot prices is called the gold/silver ratio, and is often used by investors to determine if either of the metals is undervalued as compared to the other. The gold/silver ratio measures how many ounces of silver you can buy with one ounce of gold. Below you can see the 10-year gold/silver ratio chart:

(Chart courtesy of GoldPrice.org)

The gold/silver ratio has always leaned in gold’s favor, with the ratio ranging from 32:1 to 84:1 over the last 10 years. The ratio at the time of this writing (February 15, 2012) is roughly 51.6:1.

Liquidity

Both gold and silver are extremely liquid assets, viewed by all as a valuable commodity, and even viewed by many as an actual currency. Investors can buy physical gold and silver online 24/7/365 from JMBullion.com, as well as countless other precious metal retailers.

When you are ready to unload some metal, you can sell back to most online retailers, virtually any pawn, coin, or jewelry shop, on eBay, or to other local individuals.

The gold and silver markets are about as liquid as it gets, so you never have to worry about supply shortages or getting “stuck” with metal. If we had to give a nod to one or the other, we’d say that gold is the more liquid of the two metals due to its greater demand, as well as supply over silver.

Storage/Transport

When it comes to storage and transport, gold definitely gets the nod over silver. You can fit many more dollars worth of gold than silver into the same sized safe or shipping package.

Not only is gold worth significantly more per ounce than silver, but also it is the denser of the two metals, making a specified volume of gold worth far more than an equal volume of silver.

Markup

The final topic we will discuss is the difference between the retail markup on physical gold and the retail markup on physical silver. As a precious metals investor, you always want to buy metal as close to the current spot price as you can, else the metal price has to increase significantly just for you to break even.

Now, buying metal exactly at the current spot price is all but impossible for an individual investor, as the companies you buy from make their money on their buy/sell margins, so they have to add a tiny premium just to stay in business (with the exception of 35%, 40%, and 90% silver coins, which we discuss in our next article). However, by selecting the right products and quantities, you can make sure the premium you end up paying is as little as possible.

In general, if you are spending any amount up to $1,500, silver is going to have a lesser markup than gold. At present retail prices, $1,500 would buy you just over 40 ounces of silver. At that quantity, most companies will charge a premium of about $2.25 per ounce. With silver currently sitting at about $33.50/ounce, a $2.25 premium per ounce represents a 6.7% premium over spot.

Now, let’s compare that to buying $1,500 of gold. Since 1oz of gold currently carries a retail price of about $1,785, you would have to buy gold in either grams or partial ounces, both of which carry a higher premium per ounce. At retail prices, $1,500 would buy you about 23 grams of gold. That amount of gold, based on spot price, is worth only $1,400, meaning you would be paying a 7.15% premium over spot.

For most retailers, $1,500 is about the break price for gold/silver percentage markups. Once you get higher than $1,500, you usually will pay a lesser markup for gold products. Let’s look at another example to prove this point.

Imagine you were spending $15,000 on either gold or silver – whichever had the least markup. At retail prices, $15,000 would buy you about 425 ounces of silver with a spot value of $14,216, meaning you pay a 5.5% premium over spot. At retail prices, $15,000 would buy you about 8.4 ounces of gold (the .4 ounces was spent on 11 one-gram bars) with a spot value of $14,500, meaning you pay a 3.5% premium over spot.

Based strictly on spot price premium, investors who will be putting less than $1,500 into precious metals are better off buying silver, while investors who will be putting more than $1,500 into precious metals are better off buying gold. Of course, this does not take into account personal preference or an investor’s feelings on the future outlooks for both gold and silver.