EKIP– Expert Club for Economics and Politics A Different Opinion
It is a common misconception that gold and silver are nearly identical precious metals and investments. It is true that they are very similar in many ways, and historically the most recognizable uses of each of the two metals – as jewelry and money – were the same. But this is a misleading notion, and especially these days, in addition to the similarities between the two major precious metals, there are a number of key differences that make them much different as investment assets than most people realize.
Therefore, in this and the next article, we will review the key differences between gold and silver from an investment perspective. In this article, we will focus on the differences in the use and, accordingly, demand of the two metals on a global level, and in the next one, we will analyze the differences in their supply and price dynamics. Let's start by analyzing the demand profile for gold in international markets.
Global gold demand profile
Chart 1: Breakdown of global gold demand by source
Source: World Gold Council
The chart above shows a breakdown of the total amount of gold purchased worldwide in 2016. As we can see, the largest demand for gold is for jewelry, followed by demand for gold for pure investment purposes (in the form of investment products such as coins and bars). This type of demand, by the way, is growing significantly in 2016 - in 2015 its share was only 22% compared to 56.7% for jewelry. The WGC data clearly shows that over the years there has been a significant variation in the levels of demand for different purposes, with the most pronounced variations in demand for investment purposes.
Overall, there are a few things to note about these figures. First, the very low share of demand from the industrial sector and the very high share of demand for jewelry. As we will see below, this is a major difference between the global demand profiles for gold and silver. Another thing to note is that investment demand for gold is much larger than it seems at first glance. Purchases of gold by central banks and other financial institutions actually represent investment demand, and the dynamics of this demand are influenced by many of the same factors that influence demand for gold, which falls into the narrower "investment" category.
For example, in times of economic crisis and uncertainty, demand for gold will increase both from private investors and from central and private banks. During such times, banks try to accumulate higher reserves of all kinds, including gold, to insure themselves against bankruptcies of their debtors and loss of liquidity.
In addition, part of the demand for gold for jewelry is also due to "hidden" investment demand. According to the World Gold Council, one of the main reasons why demand for gold jewelry is so high in countries like India and China (the market there formed 60% of global gold jewelry consumption in 2015) is that the population of these countries sees this jewelry as a means of securing their savings and hedging against inflation.
Global silver demand profile
Let’s now turn our attention to the uses of silver. Figure 2 presents a breakdown of global demand for silver in 2016, according to data from The Silver Institute.
Chart 2: Breakdown of global silver demand by source
Source: The Silver Institute
As we can see from the graph, silver is a much more sought-after metal in industry than gold. In 2016, 54.7% of all silver on the world market was purchased for industrial purposes. The share of this type of demand increased in 2016 from 50.3% in 2015, as did the demand for investment purposes for gold. In second and third place are the shares of silver purchased for the production of coins and bars (which are used for investment purposes) and silver used for the production of jewelry and precious stones. In last place, with a share of only 5.1%, are purchases of silver for the production of silverware and utensils.
It is noticeable that the difference between the demand for silver for industrial purposes and for investment purposes is much higher than that between the demand for gold for jewelry and that for investment. Moreover, the share of demand for investment silver in 2016 is practically equal to the demand for silver for jewelry. While for gold the share of demand for investment purposes is much higher than that for reserves of central banks and other institutions. These are very significant differences that have an important impact on the price dynamics of both metals.
The huge difference between the demand for gold and silver by industry is mainly due to the differences in the physical characteristics of the two metals. Silver is the most electrically and thermally conductive of all metals and is a key element in the manufacture of all types of electronics. The distribution of electricity, which is the main source of energy on a global scale, depends on silver contacts in switches and circuit breakers. Silver is also the most reflective metal and its use continues to be widespread in photography, and before the advancement of digital technology at the beginning of this century it was practically an indispensable material in the manufacture of all types of cameras.
What are the conclusions?
The most important conclusion we can draw from the data on the demand for gold and silver at the global level is that, in addition to being precious, silver is to a much greater extent an industrial metal than gold. Unlike silver, the demand for gold at the global level can be summarized in two main categories – for the manufacture of jewelry and for investment (after we include the demand from financial institutions in this category). However, silver, in addition to being used for the manufacture of coins, bars and jewelry, is also used for the manufacture of utensils and dishes, as well as for the manufacture of thousands of types of products in industry and electronics. This means that the dynamics of the price of silver are determined by a much wider range of different factors than that of gold.
Because of its widespread use in industry, silver is effectively a semi-industrial metal, meaning its price is much more affected by business fluctuations in the industry. Because silver is so widely used in the industrial sector, this means that reduced demand for goods in the electronics sector, for example, will also lead to reduced demand for silver, which would have a negative effect on the price of the metal.
On the other hand, at a global level , gold plays the role of an investment and monetary metal to a much greater extent than silver. This is also evident from the differences in the profiles of use of the two metals and, above all, from the fact that there is no demand for silver from central banks and other financial institutions, while they are the third largest consumer of gold.
In short, based on the differences in their demand and usage profiles, we can conclude that gold is solely a precious metal, while silver is both a precious and a quasi-industrial metal. This key difference also plays a very important role in the price fluctuations of the two metals. This is the topic of the next part – how does this difference affect the price dynamics of gold and silver, both in the long term and in the short term?
