Precious metals are once again capturing investor attention, following a significant surge late last year that was subsequently met with a sharp correction. Both gold and silver reached unprecedented highs before experiencing pullbacks as investors cashed in on profits and the broader market faced headwinds.
Currently, silver is trading around the US$82 per ounce mark, a notable drop from its record peak of US$121.64 achieved just last month. Gold is presently hovering near US$5,042 per ounce, down from its recent all-time high of approximately US$5,608. This price action prompts a closer examination of what distinguishes these two valuable commodities and why investors turn to them, especially in uncertain economic times.
The Enduring Appeal of Precious Metals
Gold and silver have a long-standing reputation for attracting investor interest during periods of economic instability. When confidence in equities, fiat currencies, or the overall economic outlook falters, individuals often seek out assets perceived as more stable and capable of preserving wealth. This behaviour is not new; it has been observed repeatedly throughout history. For instance, during the Global Financial Crisis and the more recent COVID-19 pandemic, gold, in particular, saw significant gains as markets experienced sell-offs and fear became prevalent.
Historically, major market shocks or significant economic disruptions tend to occur with a frequency of roughly every eight to ten years. This cyclical nature helps maintain the relevance of precious metals, even during periods of relative calm. While silver also benefits from this defensive appeal, it possesses an additional significant driver: industrial demand. This industrial component can, in turn, amplify price swings, making silver a more dynamic asset than gold.
Gold: The Steadfast Defensive Asset
Gold is widely recognised as a store of value. Its status is reinforced by its widespread adoption by central banks, its role in government reserves, and its use by long-term investors as a hedge against financial stress. The price of gold is influenced by a confluence of factors, including prevailing interest rates, inflation levels, currency exchange rates, and geopolitical risks. Crucially, the demand for gold is not heavily reliant on robust economic growth, which underpins its defensive profile during economic downturns.
While gold prices can experience significant fluctuations, these movements are typically more controlled compared to those of silver. This relative stability makes gold a more manageable asset for investors navigating volatile market conditions, often without the need for constant reactive adjustments.
Silver: The Volatile Dual-Purpose Commodity
Silver occupies a more complex position in the investment landscape. It functions not only as a precious metal but also as a vital industrial input. Substantial quantities of silver are consumed across various industries, including electronics, solar panel manufacturing, and general industrial processes.
This dual nature can lead to robust price rallies when economic growth prospects appear strong, as industrial demand surges. Conversely, it can also precipitate sudden price drops when economic growth expectations wane, or when speculative trading positions are unwound. The recent price movements serve as a stark illustration of this inherent risk. Silver experienced a rapid ascent to record highs, only to experience a precipitous fall within a short timeframe. Such volatility can be attractive to short-term traders, but it can present considerable challenges for long-term investors prioritising capital preservation and stability.
Accessing Precious Metals on the ASX
For Australian investors looking to gain exposure to precious metals, exchange-traded products (ETPs) offer a convenient avenue. These products allow investors to track the price movements of the underlying commodities without the need for physical storage.
Global X Physical Gold Structured ETF (ASX: GOLD): This ETF has demonstrated a strong performance, with a year-to-date gain of approximately 9%. This reflects gold’s resilience and positive run, even in the face of recent market corrections.
Global X Physical Silver Structured ETF (ASX: ETPMAG): In contrast, the Global X Physical Silver Structured ETF has seen a year-to-date gain of around 6%. However, its performance has been characterised by considerably larger price swings along the way, underscoring silver’s inherent volatility.
It is important for investors to note that while these ETPs provide easy access to precious metals, they do incur a small management fee, which is deducted over time. This fee is a standard aspect of such investment vehicles.
A Considerate Investment Approach
Both gold and silver can serve valuable roles within a well-diversified investment portfolio, albeit for different strategic purposes. Silver offers the potential for higher upside returns, but this comes hand-in-hand with larger price fluctuations and increased risk. Gold, on the other hand, typically exhibits more stable behaviour and boasts a long-standing track record as a reliable defensive asset.
For investors contemplating their holdings towards the end of the year, a choice between the two might lean towards gold. Its historical performance during market downturns has generally been more robust, its volatility is less pronounced than silver’s, and it is more widely recognised and utilised as a protective asset when financial conditions become strained.