Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Gold Or Silver, Which Is Better For Your Portfolio?

Gold and silver have always been and will always be many investors’ favorite precious metals. The summer sell-off and subsequent bounce in gold and silver has reignited investment fever in the commodities.

Traders often substitute silver for gold because the two have a strong correlation with each other. However, the commodities are very different and should not be used interchangeably despite the seeming correlation.

Trading commodity futures is difficult. This is true even if you are on the inside. There is no such thing as illegal insider information in the commodity markets. Acting on information that would result in a lengthy prison sentence in the stock market is common — and considered an edge — in the commodity markets.

A firm might have many millions in capital combined with near perfect information on supply, demand and supply chain logistics, and it might even own large stores of a commodity, but it is not guaranteed success in the volatile commodity futures market.

SPDR Gold Trust (ETF) (NYSEARCA:GLD)I have direct experience with this. Several years ago, our hedge fund advisory firm was fortunate enough to obtain capacity rights to a hedge fund that was the world’s largest trader of a particular metal commodity. (Many top hedge funds are closed to new investments and permit only those firms with relationship-driven capacity rights to invest.)

This particular fund had an incredible track record — it was up more than 100% during the year before our investment — and was led by a trader who is widely thought to be among the best in that niche. My firm makes money only when our investors make money, so as soon as the capital was deployed, I was counting my small percentage of profits as virtually in the bank, based on the reputation and track record of this fund.

It employed sophisticated hedging and correlation strategies that supposedly locked in profits. These tactics combined with the physical market knowledge created a very compelling investment.

As fate would have it, soon after we invested, the fund inexplicably plunged in value — the first time in the fund’s history that it had lost money. What an incredible letdown!

Gold and Silver
Gold is primarily used for jewelry and investment purposes, while close to half of all demand for silver is from industrial sources.

However, this situation helped cement the fact that the past does not equal the future in the financial markets. In addition, I learned that there are many “old wives’ tales” in the financial markets. One of these is that the big guys always make money. Even large funds, led by world-renowned experts, can and do lose money.

Secondly, commodities that appear to be correlated don’t provide the same opportunities for investors. Specifically, correlation on a price chart doesn’t necessarily mean one metal can be substituted for the other in an investment account. The primary reason is that each commodity is moved by different price drivers.

Price drivers are the underlying factors that affect the price of a financial instrument. Obviously, supply and demand are the primary price drivers of any stock or commodity. Price drivers break the economic theory of supply and demand into actionable parts.

The price drivers for gold and silver are very different. Gold is primarily used for jewelry and investment purposes. On the other hand, close to half of all demand for silver is from industrial sources. This means that demand for silver is tied more tightly than gold to industrial growth.

At the same time, gold demand is more closely tied to jewelry demand and macroeconomic factors like inflation and central bank actions. Unlike silver, gold is considered a store of value and is used by central banks on a grand scale for this purpose.

Supply is also very different. Both silver and gold are mined directly, but silver can be a by-product of gold refining and industrial processes.

This chart shows the ratio of the number of ounces of silver required to purchase 1 ounce of gold over the past decade.

Interestingly, there is more gold than silver aboveground. An estimated 5 billion ounces of gold have been mined, compared with 450 million ounces of silver. Despite the vast supply differences, gold is substantially more expensive than silver. Clearly, this isn’t based on supply but rather demand. The perceptions of gold as an alternative currency and investment hedge push its value far beyond that of silver.

Risks to Consider: As described earlier, precious metal investing can be extremely risky even for proven experts. This is particularly true for short-term trading. As in all investing, be certain to diversify.

Action to Take –> Despite the correlation, silver and gold are two different commodities with different underlying price drivers. Due to its lower price, silver can exhibit greater volatility than gold. Based on this, silver is a superior short-term trading vehicle, whereas gold makes more sense for the long term. A balanced portfolio will contain both gold and silver in a ratio best suited for the individual’s goals.

As a longer-term trading vehicle, I like the SPDR Gold Trust (ETF) (NYSEARCA:GLD). Buying a breakdown to the 50-day simple moving average in the $128 range or a breakout above $135 makes solid technical sense right now.

P.S. — I’m not the only one who is a fan of gold right now… StreetAuthority’s Dave Forrest recently put together a compelling chart you have to see… Once you do, I think you’ll be convinced gold is a good investment right now. Click here to see it now.

– David Goodboy
The article Gold Or Silver: Which Is Better For Your Portfolio? originally appeared on StreetAuthority and is written by
David Goodboy.
David Goodboy does not personally hold positions in any securities mentioned in this article. 
StreetAuthority LLC does not hold positions in any securities mentioned in this article. 

Warren Buffett’s Top 5 Stocks

Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.