The role of silver in your portfolio
31 August 2022
Dear Investor,
While it doesn’t get anywhere near as much attention in the financial news media as gold does, silver is a very popular asset amongst precious metal investors, and one that can deliver very strong investment returns.
Indeed, in precious metal bull markets, it is often silver that leads the way, outperforming gold in percentage terms.
In this article, we look at some of silvers investment characteristics, compare these factors to gold where relevant, and highlight the role that silver can play in an investment portfolio today.
Investment comparison – gold vs silver!
Long-term returns
Since the start of the 1970s, the price of gold has risen by approximately 8% per annum in USD terms. The price of silver has risen by closer to 5% per annum over this time period.
Since the start of the new millennium the gap in performance has been narrower, with the price of gold up by almost 9% per annum, while silver has risen by almost 7% per annum.
Both gold and silver can deliver strong long-term returns.
Volatility
Silver is the more volatile of the two assets, with annualised volatility of 33%, compared to 20% for gold. That higher volatility is simply the price one pays to participate in the profits rising silver prices can offer, as it has historically moved to both the upside and the downside at a more rapid rate than gold has.
Bull market cycles
Silver has seen some very significant bull market cycles over the past 50 years, where the performance has not only soared in absolute terms, but strongly outperformed gold in the process.
This can be seen in the table below, which highlights five of the biggest bull market runs for silver since the 1970s.
Gold and silver returns during precious metal bull markets
ABC Bullion, London Bullion Market Association
As you can see, the average increase in the silver price in these periods was almost five times what the average increase in the gold price was, with silver outperforming gold in every one of these bull market cycles.
Inflation protection
In the years that inflation in the US has averaged 3% or more, gold has risen by an average of 15%. In those same years, silver has risen by an average of 18%.
This data highlights that both precious metals have a great track record in periods where consumer prices are rising rapidly, as they are today. That doesn’t mean they’ll rise in price every year inflation is high, but it does suggest, if history is any guide at least, that in the fullness of time, silver is likely to prove an effective inflation hedge.
Relationship with the stock market
One of the great attractions of investing in gold is its historical ability to provide portfolio protection when the stock market falls, with the precious metal typically being the highest-performing asset in such an environment. Gold is also positively correlated to rising stock markets, meaning it will tend to rise when the stock market does.
Silver doesn’t have quite the same track record from a protection perspective in this regard, in that it often falls when the stock market does. This is unsurprising given silver is seen by the market as a part monetary asset, part industrial commodity, whereas gold is seen almost exclusively as a monetary asset.
Nevertheless, as per the table below, silver has tended to fall by much less than the stock market in the months and rolling 3-month periods the stock market has fallen. Like gold, silver has also historically delivered positive returns in the rolling 12-month periods stocks have fallen.
Average returns in periods the stock market rises or falls 1970 to 2022
ABC Bullion, London Bullion Market Association
The table also makes it clear that like gold, silver is positively correlated to a rising stock market, having historically delivered positive returns in the months, rolling 3-month and rolling 12-month periods stocks are up.
Indeed, silver has strongly outperformed gold in such environments.
Take-aways for investors...
The data presented in this article highlights clearly the role that silver can play in a portfolio.
While it has historically been more volatile than gold and hasn’t offered quite the same portfolio diversification benefits that gold has in periods stock markets fall, it has generated strong long-term returns in its own right.
Silver has also been a stronger performer than gold in periods of high inflation.
Perhaps most importantly though, it also offers the potential for much faster, and far more significant price gains than gold during precious metal bull market cycles.
That is a highly relevant factor for those looking to maximise their returns with the precious metal allocation in their portfolio today.
Warm regards,