April 8th, 2020
The below references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
The demand for physical precious metals for retail investors has skyrocketed since the world shut down due to Covid-19. Through much of late March to the time of this articles writing, silver and gold have been quite difficult to obtain. Below I would like to share my thoughts on why gold still has the slight advantage over silver when it comes to stacking for this year and possibly for quite some time to come.
Gold has traditionally been viewed as a hedge against inflation and uncertainty in economic recessions. This is especially true in less powerful nations; if their currency loses value or their economy collapses it can be exchanged at a later time for a stronger currency (i.e. USD, EUR, JPY, etc.) and preserve the individual’s wealth. Furthermore, from a logistical standpoint, if a nation wanted to preserve its wealth it would always choose gold over silver.
First, from a hypothetical point of view, for example, if Russia purchased 10 tons of gold bars from England, it would have to secure the logistics, the security, the auditing and testing of purity, and finally the storage space. The same investment in silver, which at the time of this article trades at a ratio of gold to silver at 1:109, that means Russia would have to repeat the logistics process over a 100 times, audit and test over 100 times more and find the storage space for 100 times the amount. As a long time, silver and gold stacker, I myself have suffered from this storage dilemma.
Silver, especially in the last decade has shifted to more of an industrial metal, than a precious metal. Nations like China prefer a stable lower price for the metal as it is used in a wide array of products ranging from cars and electronics to solar panels and medical supplies. If the economy suffers, much like now due to COVID-19, demand for the metal drops as production slows. If we look at previous economic collapses in 2008, 2001, and 1987, physical silver performed poorly as a hedge.
At the time of this article an ounce of gold is $1670.90 USD and silver is $15.24 for one ounce. Visiting any online retailer and checking the current prices for some of the most commonly stacked coins reveals something shocking; the huge difference between premiums.
Apmex for example is charging $1840.89 for a 1 oz gold American Eagle. Price - Spot = 169.99 / 1670.90 = 0.1017 or 10% premium for an ounce of gold.
Silver on the other hand is $25.25 an ounce on Apmex for a 1 oz Silver American Eagle. Price - Spot = 10.01 / 25.25 = 0.3964 or 40% premium for an ounce of silver.
Yes, we can argue that the price of paper silver is being manipulated; but the fact remains when you go to cash in your silver, you will not be honored that same premium, most local coin shops will pay $1 or $2 dollars over spot at best. From a premium cost perspective gold is clearly the winner over silver.
This alone will put those with deep pockets and uncertainty into physical gold. The inflation this will cause in the future at this point is unknown; but having money put aside in something that is recognized the world over as a store of wealth is a very wise move.
Prior to the COVID-19, in late 2018 and early 2019, the stock market was already considered overvalued by investors and many thought a correction was long overdue, leading to gold increasing by over 20% in 2019 alone. Silver does not have this luxury as a safe haven asset and will likely decrease in value if the metal is not required in production use cases.
If the premiums of silver can come significantly lower, with the spot price hovering around or under $17 USD, I think silver would be a good play; especially if your time frame exceeds 5 years. Eventually demand for silver rise for use in production and a stable economy will cause money to move out gold as a safety play. This will lead to gold to silver ratio correcting back to historical averages.
My play for the rest of 2020 is to continue to purchase precious metals with gold taking up 80% and silver taking up 20% of my purchases.