Posted on February 8, 2019
It has been well established that gold is a great way to store and preserve wealth, especially in a world of fiat currency. But what about the other precious metals such as silver, platinum and palladium? Should you also have exposure to these metals or can these metals replace gold in a portfolio?
Lets first revisit the main purpose in why we use precious metals in a portfolio in the first place. It’s not speculation. It’s not income generation. It’s not wealth creation. Rather, the main purpose is to preserve wealth. Gold and silver have a very long history of not only being money but also preserving wealth. Platinum and palladium do not have a history of being money, but they do have some preservation qualities. Since silver, platinum and palladium have an ability to preserve wealth it comes down to how well they are expected to preserve wealth when compared to gold. Let’s now compare each metal against gold to evaluate the future potential of wealth preservation.
Silver has nearly all the same qualities and history as gold except for being less scarce. Silver, along with gold, has been used as a currency for centuries and its ability to hold value over time is well documented. In fact, silver appears to be just as good as gold in many aspects.
Yet silver is inferior to gold in nearly every way.
Silver is also more volatile than gold (volatility is another way of saying risk). If gold is up 1% then silver is generally up more than 1%. The reserve however is also true. Volatility can be used to amplify gains (and losses) but that is speculative behavior that we are trying to avoid when investing in precious metals. In summary we can conclude that silver has more risk than gold.
Storage costs are around 50% higher than gold since there is much more metal volume for the same amount of value. For example, 10 troy ounces of gold, weighing around 0.7 pounds, is worth the same as 820 troy ounces of silver, weighting 56 pounds. Mobility of wealth is also greatly impacted as well.
Premiums, the amount paid in excess of the melt value, to buy silver are much higher than gold. A typical premium on a generic one troy ounce of gold is around 1.8% whereas the typical premium on a generic one troy ounce of silver is over 6%. Silver prices would have to rise over 6% just to break even. Premiums decrease on larger amounts of silver but not drastically. A 100 troy ounce generic silver bar has a typical premium of around 5%. Good resources to check premiums can be found at comparesilverprices.com and comparegoldprices.com.
Further, silver is more widely used as an industrial metal than as a precious metal. The United States Geological Survey found only 31% of silver is used in the form of coins, and bullion and jewelry.
For gold the figure is 60%.
Since more than 70% of silver is mined as a biproduct of copper and nickel, the supply of silver is driven mostly by economic business cycles. This ultimately translates into more volatility in silver as other factors, such as business conditions and industrial usage, impacting the price of silver.
Gold appears to be less volatile, less costly to buy and store when compared to silver.
Platinum and palladium can be grouped together since they share many similarities such as usage, rarity and history. Both are part of the platinum group of metals and both are used for investment (bullion and coins), jewelry and industrial applications, with automotive catalysts being the vast majority of industrial use. Investment and jewelry usage are relatively low compared to usage in the industry. In fact, both platinum and palladium are classified as industrial metals.
Platinum’s main use is in the fabrication of diesel autocatalysts for reducing pollution. Palladium on the other hand is mainly used in the fabrication of gasoline autocatalysts. While fossil fuel vehicles will continue to be used in the near future, it doesn’t take much to get a general idea that electric vehicles will gradually replace fossil fuel vehicles over time. With a significant source of demand coming from a sector that will slowly give way to a vehicle that doesn’t need a catalyst, it doesn’t take much to figure a large portion of demand will wane. Basic economics tells us as the demand curve shifts left, the price must decline to get to equilibrium. In other words, we can predict a gradual decline in the ability to preserve wealth in platinum and palladium, as compared to gold, as a major source of demand will fizzle.
Gold appears to be king as compared to the other precious metals with silver coming in a close second. However, silver doesn’t do anything better than gold so there is little reason to invest in silver. Platinum and palladium appear to have major headwinds in the future and their ability to retain value is in question.