Is silver the best way to play the gold boom?
NEW YORK (February 15) Gold continues to beat the headwinds of high rates and a strong dollar amid its rally toward $3,000, but while the major drivers remain in place, silver may be the better play going forward, according to Tom Stevenson for Fidelity International.
After noting that gold prices have increased by a factor of 10 since 2000, and by over $1,000 since late 2023, Stevenson said the yellow metal really shouldn’t be this high.
“Traditionally, the precious metal performs badly when interest rates rise,” he said. “That is because, unlike bonds, shares, cash, or property, it does not pay investors an income. When the yields on those other assets are attractive, there is less incentive to hold ‘the barbarous relic’ as the economist John Maynard Keynes called gold. That is the case today, but still gold is hitting new records.”
Stevenson said gold should also favor a weak dollar. “The metal is denominated in the US currency. When other currencies are strong versus the dollar, they can buy more gold. When they are weak against the greenback, they can buy less, and so the price should fall,” he wrote. “Today’s Trump-fuelled strong dollar should be a headwind for the gold price. Clearly, it is not.”
“So, the performance of gold is telling us something else,” he said. “The message it sends is that all is not well with the world. It says that investors are worried, and history shows that it is unwise to ignore the signals that gold sends at times of stress.”
Stevenson pointed out that the S&P 500 nearly doubled in value from 2003 to 2007 – just before the financial crisis – but it still underperformed gold by around 40%. “Gold investors did not trust what the stock market was telling them,” he said. “And they were right.”
Stevenson offers several reasons why gold’s performance is so strong. “The first is gold’s perceived safe-haven qualities when the world looks uncertain,” he said. “The election of Donald Trump has massively increased the unpredictability of US policy, on many fronts but notably on trade and tariffs. At the same time, gold is a hedge against inflation. Many Trump policies, not just tariffs, are likely to be inflationary. It is a perfect storm for gold.”
And the world’s central banks are also hedging their bets. “Ever since the invasion of Ukraine, and the sanctions that followed, countries such as Russia, China, India, and Turkey have been increasing their purchases of gold, in a bid to reduce their exposure to the US dollar,” Stevenson said. “Gold has long been a store of value and a diversifier, without the credit risk associated with paper currency reserves. Central bank purchases exceeded 1,000 tonnes for the third year in a row in 2024.”
He also sees Deepseek’s announcement that it could outperform ChatGPT on the cheap as a blow to the confidence in equities and potentially rising industrial demand for gold as additional support for the gold rally.
“With the price having moved so far, so fast, however, investors are right to question whether the gold ship has already sailed,” Stevenson said. “Historically, the gold price moves in steps, rising rapidly and then consolidating or falling, often for many years. Might there be a better way to hedge against the uncertain outlook?”
Stevenson suggests investors may want to look at silver. “The two are similar - both precious metals, historically used as currencies - but they are also very different,” he wrote. “More than half of the annual demand for silver comes from industrial uses, in myriad electronics applications - notably renewable energy, artificial intelligence (AI), and defence. Also, in the chemicals industry and in medical equipment - bacteria will not grow on silver. But, as with gold, macro drivers such as inflation and interest rates, geo-political stress, and policy shifts are an influence on the silver price.”
Stevenson said that while the gold:silver ratio traditionally reflected the 15:1 ratio of underground supply of the two metals, this is no longer the case. “Today, the gold price is one hundred times that of silver,” he said. “The preference for gold as a risk management tool justifies this in part, but it does not recognize the growing deficit between supply of and demand for silver.”
“The traditional correlation between the two metals has broken down and gold looks overvalued compared to silver, which remains well below its recent peak,” he added.
Stevenson suggested that the best ways to benefit from silver’s upside is either via silver ETFs or silver miners’ stocks, as holding physical silver “is expensive, risky, and impractical,” but cautioned that mining stocks only loosely follow the precious metal’s price.
Gold prices have seen a pullback following the weaker-than-expected retail sales report for January, hitting a session low of $2,888.63 per ounce and last trading at $2,896.48 for a loss of 1.09%.
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