With all the headlines surrounding gold’s impressive run, it’s easy to overlook silver. Gold has performed strongly. In rupees, it is up 40% this year, and in dollars, it is up 37%. But silver has done even better. In rupees, silver is up about 50% this year, and in dollars, it is up 46%. That’s an approximately 9% outperformance. The difference between the dollar and rupee gain is due to rupee falling by 3% against the dollar this year.
A Tale of Two Metals
For all practical purposes, gold is a pure safe haven asset. It is the best hedge against inflation. It’s what you want to hold when things go bad. Silver, on the other hand, is not. It is a both a safe haven asset and one with a significant industrial component. This means that it isn’t going to protect your portfolio in bad times in the same way gold does.
The Best of Both Worlds
The industrial demand for silver means that good economic news will sometimes be good for silver. The safe haven component means that high inflation or high uncertainty will also be good for silver. It turns out, this is exactly the environment we find ourselves in today.
Why Silver Shines in a Confused Market
As I discussed last time, we have an unusual scenario where uncertainty is high, but stock markets continue to soar. Investors are worried, and this has driven both gold and silver to record highs. At the same time, economic activity remains strong. And as a result, the stock markets are performing well.
Why are investors worried when the economic activity is strong?
Investors are worried because of geopolitical uncertainty. The precious metals rally has coincided with the Trump administration’s drive to remake global trade. Most of Trump’s trade policies have been unpredictable and fast moving. No one really knows where these will settle. And furthermore, we don’t know what the long-term effects are. We can guess (and I have ideas), but it is uncertain, nonetheless. For this reason, precious metals are the best performing asset class this year.
At the same time, we haven’t yet had any major negative effects from the tariffs. This isn’t to say it won’t happen, but its business as usual for now. This is why silver has outperformed gold this year. It is benefitting from safe haven demand, while also benefitting from strong economic activity.
An Investor’s Takeaway
For an investor, what’s the best approach? It is recommended that investors hold some portion of their portfolio in gold as a hedge against an uncertain future. That’s good advice. An even better approach is to diversify holdings of precious metals. Hold not just gold, but also silver.
Since gold is the ultimate safe haven, it should still form the bulk of your precious metals allocation. Silver is a somewhat risker hedge. If stock markets fall and economic activity drops, silver will underperform gold. But if the stock market continues to go up, silver will do better than gold. For this reason, if you already hold equities, silver doesn’t need to be a large part of your precious metals allocation. But a small holding can give you diversification and may improve your returns.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.