Gold vs. Silver

For the believer in precious metals, the choice of which ones to put one’s faith in is far from simple. While supply and demand fundamentals may be significant in the overall picture – particularly for the more industrially oriented metals - the very fact that this group of metals carries the ‘precious’ tag has tended to generate something of a premium.

All are affected to some extent by movement in the price of gold.

Meanwhile bitcoin, by comparison, looks to me as an asset that equates pretty much to a Ponzi scheme reliant on the unwary being seduced into buying it for any continuing price growth.

Its hugely volatile ups and downs confirm it as a potentially unsafe asset for longer term wealth preservation – at least in the opinion of this writer.

In terms of usage and demand patterns silver and the platinum group metals (pgms) tend to fall nowadays more into the industrial camp – or should – as that is where the most significant part of their demand arises.

This is probably true above all of palladium – and also for rhodium if one also includes the rarer pgm elements.

Here demand dependence relies very much on the ups and downs in the economy, including the automobile market. Palladium/rhodium combination catalyst is a prime constituent of the mandatory exhaust cleaning systems used in new gasoline powered vehicle internal combustion engines in many of the world’s nations.

As environmental concerns grow, so also do the catalytic loadings in the exhaust emission control units, which has been creating supply shortages for the metals and a consequent sharp rise in prices as manufacturers struggle to meet demand.

Platinum at one time used to be the main catalytic element utilized in these emission control systems, but at that time platinum was hugely more expensive than palladium. This may have led, in part, to a substitution of palladium for platinum in the catalytic converters needed for exhaust emission control – a position it has held since.

But a resulting huge palladium supply deficit has led to this pricing position being reversed over the past year or so. So, there is the distinct possibility that platinum could again become a much more significant catalytic metal used in gasoline engine exhaust emission control systems as a potentially now far less costly option.

While such a move may help redress the demand balance and close the price gap between the two metals, a consequent change in the demand balance between the two makes the impact of such a move difficult to quantify. A possible outcome is that the platinum price rises and that of palladium falls to a new equilibrium level.

Platinum does have some other advantages over palladium in likely future demand. It has a more significant role in the jewelry sector and is a key metal in hydrogen fuel cell technology, which is a likely competitor with battery power looking ahead in the currently heavily promoted non-polluting vehicle market. As automotive trends favor electric vehicles going forward, and neither battery electric vehicles (BEVs) nor fuel cell technology utilize palladium, the market for the metal likely will reduce over time. This could possibly lead to a big price fall unless a significant new demand technology for the metal comes to the fore. However this demand reduction may be some years away yet; but long term the price prospects for palladium are likely to weaken accordingly.

Silver is the most difficult to assess, which perhaps accounts for its distinctly mixed price performance of the past couple of years. It retains a perhaps undeserved monetary relationship with gold despite its usage in regular coinage having fallen away virtually to zero.

It also no longer has any significant role in national monetary reserve holdings, yet it retains a psychological price relationship with gold in the eyes of many buyers and commentators, although such ties are beginning to diminish.

The industrial sectors in which silver is utilized are mostly strong growth markets now that its photographic usage has stabilized at a much lower level than in the past. It has a growing demand in photo-voltaics (solar panels), electronics and the medical sector, all of which will support demand growth fundamentals.

If this demand growth – mainly in the ‘green’ sector - continues unabated, there could come a time when demand does exceed supply and the price would advance - as would any metal commodity entering a period of short supply as we have been seeing with palladium – but probably not yet.

Silver is thus perhaps the only one of the subsidiary precious metals that is reasonably influenced by the progress, or lack thereof, of the gold price, but perhaps less so than it used to be. It used to rise further in percentage terms than gold when the latter rose in price, but when the gold price fell the reverse tended to be true.

Silver still has an important place in wealth protection, particularly in India and other parts of Asia where its role in jewelry fabrication remains significant. In Asia, where fabrication mark-ups are low, gold and silver jewelry and artifacts often form part of a family’s disposable wealth held against difficult times. Silver jewelry is also important in the West, but fabrication mark-ups are much higher making it less viable as an easily marketable wealth store.

As there are relatively few primary silver mines in the world – most global production comes as a byproduct from base metals and other precious metals mines – there is relatively little the mining industry can do to mitigate any potential silver shortfall through big production increases of silver alone. A potential short supply scenario may well be what the silver bulls are pinning their long term hopes on. Recently they seem to have been attacking, misguidedly I feel, the big silver short positions held on the futures markets, although the big banks that mostly maintain these also tend to have large stocks of physical metal to balance these short positions out.

In the meantime, silver’s ongoing price relationship with gold, although this may be diminishing in its effects, will likely continue to support the metal at a reasonable price level, but even $30 silver now looks an awfully long way off.

Gold still provides, as it has for thousands of years, a traditional safe haven for wealth protection. Its price seldom rises sufficiently to generate major get-rich-quick gains; it tends to be a slow and steady wealth accumulator protecting the holder against currency debilitation and cost inflation.

In this day and age of buyers having an expectation of rapid and big price gains, it has tended to fall out of favor with the younger generation which seems to be driving the markets currently. However it still remains an important metal for those who have seen it all before and prefer safety over potential short term gains as seen recently in equities and new assets like bitcoin.

These are prone to sharp value markdowns which, if things really go wrong could mean huge decreases in price.. Their potential price volatility reduces their roles as safe wealth protection assets.

With the multitude of conspiracy theories that tend to populate the internet and social media, social media influencers currently play a hugely important role in pushing dubious stocks and stock market-related memes. These are often instigated by those adept at playing to the social media audience.

Regarding bitcoin, we truly are in the midst of a social media-led revolution that may end in tears, and massive losses, when the almost inevitable (in my view) market crash occurs.

Except in a few cases, current equity price levels cannot be justified by real, or even potential, profits – a recipe for financial disaster.

Gold may not be the panacea to counter all the dubious activity promoted by the economically naïve commentators who grace the internet. But it has proved over time that it can ride out such episodes relatively unscathed and come out ahead of the game when buying activity returns to anywhere near normal, and when the market fallout occurs.

In short, one may not make a fortune by buying gold, but it remains one of the safest of the so-called precious metals. Unlike bitcoin, etc. the downside risks tend to be far more limited and it probably remains among the safest ways of protecting what wealth you may have.

Gold has stood the test of time for wealth protection and will likely continue to do so for many years to come!

by Lawrence Williams

Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.

The opinions expressed in this article are the author's own, do not necessarily reflect the opinions or views of Rosland Capital LLC or its employees, and do not constitute financial or investment advice or recommendations from the author or Rosland Capital or its employees. The author is compensated by Rosland Capital for his articles.