Friday , 18 August 2017

Gold vs. Silver: Which is the Best Investment?

Is there a case for holding both gold and silver? Despite the intuitive case, the empirical evidence since SLV’s inception suggests investors may not be sufficiently compensated for pairing silver with gold. [I came to that conclusion by back-testing the performance of each using a variety of analytical approaches. Read on.] Words: 645

So says Mark Motive ( in edited excerpts from an article* posted on Seeking Alpha which Lorimer Wilson, editor of (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)

Motive goes on to say, in part:

My initial reaction was to simply say “yes” because gold and silver possess very different investment characteristics:
  • Gold is a monetary asset, with supply and demand determined primarily by the condition of the currencies in which it is valued. Because gold has few industrial uses, it can be seen as a mirror that reflects the value of the global monetary system. When gold is rising in price, it usually means that confidence in monetary authorities is falling and currencies are being devalued.
  • Silver, on the other hand, is both a monetary and industrial asset. Like gold, silver has been used for thousands of years as currency and as backing for paper money. However, because silver also has many industrial uses it is affected both by monetary conditions and changes in the business cycle. Moreover, because silver is used in various industrial processes, above ground inventories are continuously depleted. In contrast, almost all the gold that was ever mined is stored somewhere on the planet.

Clearly, they are quite different so there is an intuitive case for holding both – but is there an empirical case?

To evaluate the intuitive hypothesis, I back tested the performance of SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) using the April 2006 inception date of SLV. (I could have conducted a similar evaluation using ETFS Physical Swiss Gold Trust (SGOL) and Sprott Physical Silver Trust (PSLV) or using actual silver and gold bullion prices dating back much further which, by the way, I will do in a follow-up article.) Below I show the graphic results of my back test based on a number of different bases:

1. Rolling 36 Month Correlation

[Looking at the correlation between gold and silver over a rolling 36 month period one can see in the chart below] that the correlation is high and fairly constant across time, suggesting that the diversification benefit of holding both gold and silver is limited.

2. Rolling 12 Month Correlation

While gold’s rolling 12 month returns have remained somewhat steady during the analysis period, silver’s returns have ranged considerably [as can be seen in the chart below].

3. Rolling 12 Month Return Differential

The graph below displays the difference between the two returns in the previous graph. This simply highlights the huge differences in returns experienced by gold and silver [which is anything but] consistent and predictable.

4. Average, Best, Worst 12 Month Returns

Again, the following chart displays the returns differential in another way. Clearly, SLV introduces a lot of volatility (upside and downside) to a portfolio.

5. Annualized Pair-Trade Returns

The next two graphs look at the actual results of a back-tested pair trade.

The first graph shows the annualized returns of multiple weightings ranging from 0% GLD to 20% GLD to 30% GLD and so on. There doesn’t appear to be a dramatic shift in returns, but the highest returns range around the 60% GLD/40% SLV weighting. (Note: the annualized return for the 100% silver portfolio is lower than the average 12 month return for silver. This difference occurs because of the effects of compounding.)

6. Volatility-Adjusted Pair-Trade Returns

The final graph really sums up the story. There is a distinct indication that, since SLV’s inception, investors have not been compensated for adding silver to a gold portfolio.


Based on the limited back test using SLV and GLD, in my opinion investors have been better compensated for risk by investing in 100% gold.


Editor’s Note: The above article has been has edited ([ ]), abridged, and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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