At the same time, gold tends to have a higher correlation with monetary variables such as real interest rates, inflation and changes in the value of the dollar. For example, based on annual data over the past fifty years, gold prices have had a 0.5 correlation with inflation, while the correlation between silver and inflation is around 0.35. And in earlier posts, I’ve written much about the high correlation between gold’s returns and real interest rates. While the same relationship holds for silver, it is less strong.
- Silver and gold come from different production sources, which can have an important bearing on their prices. The majority of silver is produced as a by-product of lead, zinc, copper and gold production. As such, there is not as tight a relationship between silver production and silver prices as there is between gold prices and gold production.
- Silver prices can be more volatile than gold prices, partly owing to silver’s lower ounce value and smaller market size. This volatility can make silver less attractive than gold to some investors from a portfolio construction perspective.
So where does understanding these differences leave investors?
Whether investors should consider exposure to silver or gold, or both, partly depends on why they are allocating to precious metals in the first place. Those investors that view their position in precious metals primarily as an inflation hedge may want to consider gold, which, at least historically, has done a better job of hedging portfolios against rising prices.
However, investors that are looking to play a cyclical rebound in the global economy may want to consider silver because silver prices are likely to benefit more from an uptick in manufacturing.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.