Gold vs. silver: 5 key differences to know

Many investors look for ways to add ballast to their portfolios to help 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 investors determine which metal may benefit their portfolio.

Here are several factors to consider when deciding to invest in gold or silver:

Half of all silver is used in heavy industry and high technology, including smartphones, tablets, cars, solar-panels, 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 US inflation is rising, in part because the increased costs of goods and services often coincides with a weaker US dollar. Both metals are valued in US 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, which can be challenging when managing portfolio risk. While that volatility can translate to larger short-term gains, it often carries the risk of greater downside.

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. For those who are just starting to build their portfolios, silver may be the more affordable 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, like bars and coins. The metals can be held by a third-party depository (not E*TRADE), or investors can take physical delivery if they want to store it themselves.

Holding bars and coins can have downsides. For example, 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 common way for investors to gain exposure to gold and silver, without having the responsibility of storing a physical asset. Investors 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.

The source of this Morgan Stanley article, Gold vs. Silver: 5 Key Differences You Should Know, was originally published on September 24, 2021.

1. Morgan Stanley Wealth Management Global Investment Office Chartbook, "What’s Driving Gold?"