Gold and silver are two of the oldest and most valuable metals in human history. They have been used for various purposes, such as jewelry, coinage, art, medicine, and technology. They have also served as money and store of value for thousands of years, especially in times of economic and political turmoil.
However, gold and silver have not always performed equally well as investments. Their prices, ratios, and returns have fluctuated significantly over time, depending on various factors and events. In this article, we will compare the historical performance of gold and silver since 1850 and explore their potential as alternative investments in the current economic environment.
Gold and Silver Prices, Ratios, and Returns Since 1850
Gold and silver prices have experienced several peaks and troughs over the past 170 years. Some of the most notable periods are:
The Gold Standard era (1870-1914), when most countries fixed the value of their currencies to a certain amount of gold. This created a stable international monetary system, but also limited the supply and demand of gold and silver. As a result, gold and silver prices remained relatively stable and low during this period, with gold averaging around $20.67 per ounce and silver around $1.18 per ounce.
The Great Depression era (1929-1939), when the US and other countries abandoned the gold standard and devalued their currencies to stimulate the economy. This increased the demand and price of gold and silver, as people sought to preserve their wealth and purchasing power. Gold rose from $20.67 to $35 per ounce in 1934, while silver rose from $0.34 to $0.77 per ounce in 1939.
The Bretton Woods era (1944-1971), when the US dollar became the world’s reserve currency and was backed by gold at a fixed rate of $35 per ounce. This created a stable international monetary system, but also limited the supply and demand of gold and silver. As a result, gold and silver prices remained relatively stable and low during this period, with gold averaging around $35 per ounce and silver around $1.29 per ounce.
The 1970's era (1971-1980), when the US and other countries abandoned the Bretton Woods system and allowed their currencies to float freely. This created a volatile and inflationary economic environment, which increased the demand and price of gold and silver, as people sought to hedge against currency devaluation and inflation. Gold rose from $35 to $850 per ounce in 1980, while silver rose from $1.29 to $49.45 per ounce in 1980.
The 2000's era (2000-2010), when the US and other countries faced the dot-com bubble, the 9/11 attacks, the Iraq war, the global financial crisis, and the quantitative easing policies. These events created a uncertain and deflationary economic environment, which increased the demand and price of gold and silver, as people sought to diversify their portfolios and protect their wealth. Gold rose from $279 to $1421 per ounce in 2010, while silver rose from $4.95 to $30.63 per ounce in 2010.
The 2020's era (2010-2020), when the US and other countries faced the COVID-19 pandemic, the trade war, the social unrest, and the unprecedented fiscal and monetary stimulus. These events created a mixed and unpredictable economic environment, which affected the demand and price of gold and silver, as people reacted to different scenarios and expectations. Gold rose from $1225 to $2063 per ounce in 2020, while silver rose from $20.19 to $29.42 per ounce in 2020.
The gold-to-silver ratio has also varied significantly over time, ranging from a low of 15.08 in 1920 to a high of 99.56 in 1940. Some of the most notable periods are:
The Gold Standard era (1870-1914), when the gold-to-silver ratio averaged around 16, reflecting the official bimetallic standard that fixed the exchange rate between gold and silver at 15.5 to 1.
The Great Depression era (1929-1939), when the gold-to-silver ratio rose from 16.01 to 45.09, reflecting the divergence between gold and silver prices, as gold was more favored by investors and governments as a safe haven and a monetary anchor.
The Bretton Woods era (1944-1971), when the gold-to-silver ratio averaged around 40, reflecting the dominance of the US dollar and gold as the world’s reserve currency and asset, while silver was largely demonetized and used for industrial purposes. The ratio was relatively stable during this period, as the price of gold was fixed at $35 per ounce by the US government, while the price of silver fluctuated with the market. However, the ratio also experienced some spikes and drops, as the price of silver was affected by the supply and demand shocks, such as the US silver coinage shortage in the 1960s and the Hunt brothers’ silver speculation in the 1970's
The 1970's era (1971-1980), when the gold-to-silver ratio fell from 45.09 to 17.18, reflecting the convergence between gold and silver prices, as both metals soared in value due to high inflation, low interest rates, and strong investment demand.
The 2000's era (2000-2010), when the gold-to-silver ratio rose from 56.34 to 46.61, reflecting the divergence between gold and silver prices, as gold outperformed silver due to its higher liquidity, diversification, and hedging benefits.
The 2020's era (2010-2020), when the gold-to-silver ratio fluctuated between 31.68 and 125.12, reflecting the volatility and unpredictability of gold and silver prices, as both metals reacted to different scenarios and expectations.
The following table shows the annualized returns of gold and silver in US dollars from 1850 to 2020, based on the same data sources as above.
As we can see, gold and silver returns have also varied significantly over time, depending on the economic and market conditions. Some of the most notable periods are:
The Gold Standard era (1870-1914), when gold and silver returns were close to zero, as their prices were fixed and stable.
The Great Depression era (1929-1939), when gold and silver returns were positive and high, as their prices increased due to their safe haven and monetary status.
The 1970's era (1971-1980), when gold and silver returns were positive and very high, as their prices skyrocketed due to high inflation, low interest rates, and strong investment demand.
The 1980's and 1990's eras (1980-2000), when gold and silver returns were negative and low, as their prices declined due to low inflation, high interest rates, and weak investment demand.
The 2000's and 2010's eras (2000-2020), when gold and silver returns were positive and moderate, as their prices increased due to their diversification and hedging benefits.
Factors Influencing Gold and Silver Prices, Ratios, and Returns
The performance of gold and silver as investments depends on various factors and events that affect their supply and demand. Some of the most important ones are:
Inflation and Deflation: Inflation is the general increase in the prices of goods and services over time, while deflation is the general decrease in the prices of goods and services over time. Inflation reduces the purchasing power of money, while deflation increases the purchasing power of money. Gold and silver tend to perform well during inflationary periods, as they preserve their value and purchasing power, while they tend to perform poorly during deflationary periods, as they lose their value and purchasing power. For example, gold and silver prices rose sharply during the 1970's, when the US and other countries experienced high inflation, while they fell sharply during the 1930's, when the US and other countries experienced deflation.
Interest Rates and Monetary Policy: Interest rates are the cost of borrowing or lending money, while monetary policy is the action taken by central banks to influence the money supply and interest rates. Interest rates affect the opportunity cost of holding gold and silver, as they compete with other interest-bearing assets, such as bonds and savings accounts. Monetary policy affects the availability and value of money, as it influences the inflation and deflation expectations. Gold and silver tend to perform well during low interest rate periods, as they have a lower opportunity cost, while they tend to perform poorly during high interest rate periods, as they have a higher opportunity cost. Gold and silver also tend to perform well during expansionary monetary policy periods, as they hedge against currency devaluation and inflation, while they tend to perform poorly during contractionary monetary policy periods, as they hedge against currency appreciation and deflation. For example, gold and silver prices rose sharply during the 2000's and 2010's, when the US and other countries adopted low interest rate and quantitative easing policies, while they fell sharply during the 1980's and 1990's, when the US and other countries adopted high interest rate and tight money policies.
Fiscal Policy and Geopolitical Events: Fiscal policy is the action taken by governments to influence the spending and taxation of the economy, while geopolitical events are the occurrences that affect the political and economic relations among countries. Fiscal policy affects the fiscal deficit and debt of governments, as they influence the borrowing and spending of the public sector. Geopolitical events affect the stability and security of countries, as they influence the risk and uncertainty of the global environment. Gold and silver tend to perform well during high fiscal deficit and debt periods, as they hedge against government default and credit risk, while they tend to perform poorly during low fiscal deficit and debt periods, as they hedge against government solvency and creditworthiness. Gold and silver also tend to perform well during unstable and insecure geopolitical periods, as they hedge against war and conflict risk, while they tend to perform poorly during stable and secure geopolitical periods, as they hedge against peace and cooperation. For example, gold and silver prices rose sharply during the 2000's and 2010's, when the US and other countries faced the global financial crisis, the trade war, the COVID-19 pandemic, and the social unrest, while they fell sharply during the 1990's, when the US and other countries enjoyed the end of the Cold War, the globalization, and the economic growth.
Industrial Demand and Investment Demand: Industrial demand is the demand for gold and silver for their industrial uses, such as electronics, medicine, and technology, while investment demand is the demand for gold and silver for their investment purposes, such as portfolio diversification, hedging, and speculation. Industrial demand affects the consumption and production of gold and silver, as they influence the physical supply and demand of the metals. Investment demand affects the sentiment and expectation of gold and silver, as they influence the psychological supply and demand of the metals. Gold and silver tend to perform well during high industrial demand periods, as they increase their physical scarcity and value, while they tend to perform poorly during low industrial demand periods, as they decrease their physical scarcity and value. Gold and silver also tend to perform well during high investment demand periods, as they increase their psychological attractiveness and value, while they tend to perform poorly during low investment demand periods, as they decrease their psychological attractiveness and value. For example, gold and silver prices rose sharply during the 1970's and 2010's, when both metals experienced high industrial and investment demand, while they fell sharply during the 1980's and 1990's, when both metals experienced low industrial and investment demand.
Advantages and Disadvantages of Investing in Gold and Silver
Investing in gold and silver has its pros and cons, depending on the objectives and preferences of the investors. Some of the most common ones are:
Liquidity: Liquidity is the ease and speed of converting an asset into cash without losing its value. Gold and silver are highly liquid assets, as they can be easily bought and sold in the global market at any time and at any place. This makes them convenient and flexible for investors who need to access their funds quickly and easily. However, liquidity also comes with a cost, as gold and silver are subject to transaction fees, commissions, and taxes, which reduce their net returns. Moreover, liquidity also exposes gold and silver to market fluctuations, as their prices can change rapidly and unpredictably, which increase their risk and volatility.
Diversification: Diversification is the strategy of spreading the investments across different assets, sectors, and regions, to reduce the overall risk and volatility of the portfolio. Gold and silver are good diversifiers, as they have low or negative correlation with other assets, such as stocks, bonds, and real estate. This means that they tend to move in opposite or different directions from other assets, especially during market downturns and crises. This makes them effective for reducing the portfolio risk and enhancing the portfolio returns. However, diversification also comes with a trade-off, as gold and silver have lower expected returns than other assets, such as stocks, in the long run. This means that they tend to underperform other assets, especially during market upturns and booms. This makes them inefficient for maximizing the portfolio returns and growth.
Hedging: Hedging is the strategy of protecting the value of an asset or a portfolio from adverse price movements, by taking an opposite position in another asset or a derivative. Gold and silver are good hedgers, as they have high intrinsic value and purchasing power, which are independent of any government or institution. This means that they tend to retain or increase their value during periods of currency devaluation, inflation, deflation, and geopolitical risk. This makes them effective for preserving the wealth and purchasing power of the investors. However, hedging also comes with a cost, as gold and silver have high volatility and unpredictability, which are dependent on various factors and events. This means that they tend to experience large price swings and fluctuations, which can erode their value and purchasing power. This makes them risky and uncertain for achieving the goals and objectives of the investors.
Opportunity Cost: Opportunity cost is the value of the next best alternative that is forgone as a result of choosing a particular option. Gold and silver have high opportunity cost, as they have low or no income generation, such as dividends, interest, or rent. This means that they do not provide any cash flow or income to the investors, which can be reinvested or spent. This makes them costly and unproductive for compounding the wealth and income of the investors. However, opportunity cost also depends on the alternatives available, as gold and silver have low or negative real returns, which are adjusted for inflation. This means that they do not provide any growth or appreciation to the investors, which can offset the inflation and increase the real value. This makes them attractive and competitive when the alternatives have lower or negative real returns, such as bonds and cash.
Current and Future Outlook for Gold and Silver
The current and future outlook for gold and silver depends on the expectations and scenarios of the economic and market conditions. Some of the most relevant ones are:
The COVID-19 Pandemic and Recovery: The COVID-19 pandemic has caused a global health and economic crisis, which has affected the supply and demand of gold and silver. On the one hand, the pandemic has increased the investment demand for gold and silver, as they have acted as safe havens and hedges against the uncertainty and risk of the crisis. On the other hand, the pandemic has decreased the industrial demand for gold and silver, as they have been affected by the lockdowns and disruptions of the production and consumption activities. The recovery from the pandemic will depend on the speed and effectiveness of the vaccination and reopening programs, which will influence the growth and inflation prospects of the economy. A faster and stronger recovery will favor silver over gold, as silver will benefit from the increased industrial demand and the higher inflation expectations. A slower and weaker recovery will favor gold over silver, as gold will benefit from the increased investment demand and the lower growth expectations.
The Fiscal and Monetary Stimulus: The fiscal and monetary stimulus are the measures taken by the governments and central banks to support the economy and the financial system during the crisis. The fiscal stimulus involves increasing the spending and reducing the taxation of the public sector, while the monetary stimulus involves lowering the interest rates and increasing the money supply of the central banks. The fiscal and monetary stimulus have affected the supply and demand of gold and silver. On the one hand, the stimulus have increased the investment demand for gold and silver, as they have acted as hedges against the currency devaluation and inflation caused by the stimulus. On the other hand, the stimulus have decreased the opportunity cost of holding gold and silver, as they have reduced the returns and attractiveness of the alternative assets, such as bonds and cash. The continuation or withdrawal of the stimulus will depend on the balance and coordination of the fiscal and monetary policies, which will influence the debt and deficit levels of the governments and central banks. A continuation or expansion of the stimulus will favor gold and silver, as they will benefit from the increased currency devaluation and inflation risks. A withdrawal or contraction of the stimulus will harm gold and silver, as they will suffer from the increased currency appreciation and deflation risks.
The Geopolitical Tensions and Conflicts: The geopolitical tensions and conflicts are the disputes and disagreements among countries over political, economic, and security issues. The geopolitical tensions and conflicts have affected the supply and demand of gold and silver. On the one hand, the tensions and conflicts have increased the investment demand for gold and silver, as they have acted as safe havens and hedges against the instability and risk of the global environment. On the other hand, the tensions and conflicts have decreased the industrial demand for gold and silver, as they have been affected by the sanctions and disruptions of the trade and cooperation activities. The resolution or escalation of the tensions and conflicts will depend on the dialogue and negotiation of the countries involved, which will influence the peace and cooperation prospects of the world. A resolution or de-escalation of the tensions and conflicts will harm gold and silver, as they will suffer from the decreased instability and risk of the global environment. An escalation or continuation of the tensions and conflicts will favor gold and silver, as they will benefit from the increased instability and risk of the global environment.
The most likely scenario for gold and silver in the near future is:
A moderate recovery from the COVID-19 pandemic, with some setbacks and challenges along the way.
A gradual withdrawal of the fiscal and monetary stimulus, with some adjustments and coordination among the governments and central banks.
A stable but tense geopolitical situation, with some disputes and disagreements among the countries.
This scenario implies that gold and silver will have a mixed and balanced performance in the near future, as they will face both positive and negative factors and events. However, this scenario also implies that silver will have a better performance than gold in the near future, as silver will have more upside potential and less downside risk than gold. This is because:
Silver has a lower price and a higher volatility than gold, which means that it can have larger price movements and higher returns than gold, especially during periods of high inflation and growth.
Silver has a lower ratio and a higher undervaluation than gold, which means that it can have a higher convergence and appreciation than gold, especially during periods of low interest rates and high investment demand.
Silver has a higher industrial and a lower investment demand than gold, which means that it can have a higher growth and a lower risk than gold, especially during periods of high technological and environmental innovation.
Why Silver May Be a Better Investment Than Gold in the Long Term
Based on the historical trends and the current market factors, we argue that silver may be a better investment than gold in the long term, for the following reasons:
Silver has a lower historical ratio and a higher historical undervaluation than gold, which means that it has more room to catch up and surpass gold in the future. The historical average of the gold-to-silver ratio is around 50, while the current ratio is around 85. This means that silver is currently trading at a 70% discount to gold, which is near its all-time low. This also means that silver has the potential to double or triple its value relative to gold, if it reverts to its historical average or median.
Silver has a higher potential growth and a lower opportunity cost than gold, which means that it can offer higher returns and lower costs to the investors in the future. Silver has a higher industrial and a lower investment demand than gold, which means that it can benefit more from the increased demand and supply of the various sectors and industries that use silver, such as clean energy, electronics, healthcare, and jewelry. Silver also has a lower income generation and a lower real return than gold, which means that it can benefit more from the reduced returns and attractiveness of the alternative assets, such as bonds and cash.
Silver has a higher diversification and a lower correlation than gold, which means that it can offer lower risk and higher reward to the investors in the future. Silver has a lower correlation and a higher volatility than gold, which means that it can move in different or opposite directions from gold and other assets, especially during market downturns and crises. Silver also has a higher volatility and a higher beta than gold, which means that it can amplify the movements and returns of gold and other assets, especially during market upturns and booms.
Conclusion
In this article, we have compared the historical performance of gold and silver since 1850 and explored their potential as alternative investments in the current economic environment. We have found that gold and silver have not always performed equally well as investments, as their prices, ratios, and returns have fluctuated significantly over time, depending on various factors and events. We have also found that gold and silver have their pros and cons as investments, as they have their advantages and disadvantages in terms of liquidity, diversification, hedging, and opportunity cost.
One could make the argument that silver is an undervalued asset that may offer higher returns than gold in the future, based on historical trends and current market factors. In this article, we do our best to explain why silver may have a lower price, a higher volatility, a lower ratio, a higher undervaluation, a higher potential growth, a lower opportunity cost, a higher diversification, and a lower correlation than gold in the long term.
We hope that this article has provided you with some useful and interesting insights on gold and silver as alternative investments. We also hope that this article has inspired you to do your own research and analysis on these precious metals, and to make your own informed and rational decisions on whether to buy or sell them. Remember, investing in gold and silver is not a one-size-fits-all strategy, but a personal and subjective choice, that depends on your goals, preferences, and risk tolerance.
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