“The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice.” — Henry Hazlitt, “The Search for an Ideal Money”
Hazlitt, when he wrote the above words in the midst of America’s struggles with inflation in the 1970s, could have been writing of the precious metals as a group.
“Gold” often serves as a synecdoche of the whole asset class. The precious metals constitute a hedge against inflation, they have intrinsic value, holding these assets creates no counterparty risk, they are easy to sell (that is, very liquid), and they add diversity to a portfolio. But these points are all merely variations on Hazlitt’s theme.
Half a century later, many investors decided that Hazlitt was right. They want in on precious metals. This brings them to the next question: how should they go about choosing the particulars?
As a partial answer to that question, what follows is a discussion of the differences among gold, silver, platinum, and palladium, and how they matter.
We will not discuss financial derivatives, indexes, ETFs, mutual funds, or mining stocks as ways of gaining exposure to these metals. All those options exist, and they are important, but they are the proper subject of subsequent articles.
For now, we will generally assume an investor interested in the physical ownership of a precious metal, though some of our observations here will be pertinent to those other plays as well.
Palladium: Coins, Converters, and Risk
Let us consider palladium.
Like each of the other metals just described, palladium is used in jewelry. But most of the action of this metal is in its industrial uses.
And there’s the rub, for palladium’s chief industrial use is in neutralizing harmful emissions. That is 80% of the metal’s demand. A scaled move away from the internal combustion engine toward alternative means of transit could be a serious blow to demand. Even short of that, automakers could devise a way to accomplish the catalytic conversion with a less expensive metal.
Palladium is also used in coinage, although that is rare and recent. The first recorded case was occasioned by the coronation of a King of Tonga in 1967. The government of that South Pacific island commemorated the ascension of King Taufa Ahau Tupou IV with a palladium coin.
In general, palladium is a very speculative play for a retail investor.
Platinum Bars, Coins, and Price Moves
Let’s move on to platinum, another industrial metal.
It is possible to buy physical platinum either as a bar (the sizing of the bars depends on the foundry) or as a coin. But platinum bars are both inconvenient to store and illiquid.
Platinum coins are a somewhat more recent phenomenon than gold or silver coins, but still, they preceded the coronation of the King of Tonga by more than a century. Such coins were an innovation of the Russian monarchy in the early 19th century. They’ve had a spotty history since, in part because they can be uncomfortably easy to counterfeit.
More recently, there has emerged a very convenient way for retail investors to expose themselves to this metal: the U.S. mint has been issuing the American Platinum Eagle since 1997.
As to price, what is intriguing about platinum is that although its price moves roughly correlated with those of gold from 1985 to 2014, they have followed very different paths in the years since.
Both metals peaked and fell sharply in the midst of the global financial crisis of 2008, and both quickly recovered.
Platinum hit another peak in January 2011. Gold did the same. Then each headed south, but gold reversed its course, heading up again in 2014 as platinum continued down. One likely explanation for this divergence: in June 2014, the European Central Bank announced nominal negative interest rates, because the ECB was afraid of deflation. This may have pressed some investors to look for an inflation hedge. Gold is among those, platinum is not.
Gold and platinum have been uncorrelated since that time, although it is too soon to declare that a reliable trend. What is clear, though, is that platinum has not attained the safe harbor status that belongs so conspicuously to silver and gold. Historically, it is also the most volatile of the four.
The Two Ancient Plays: Gold and Silver
The history of gold and silver is measured not in centuries but in millennia. Gold has been employed for decorative purposes since around 4000 BC. Silver, likewise, was used to fashion beads in predynastic Egypt. Gold and silver may have had a common origin as currencies somewhat later. Both were used as such in Lydia (Asia Minor) in the late 8th century BC.
Today, while gold and silver each maintain their aesthetic appeal, they also have acquired industrial uses that would have been unimaginable to the Lydians. In the words of Bert Chandler, Penn State professor of chemical engineering, “Gold is valuable because it is highly selective, reacting with one molecule but not another. This is a very desirable characteristic in lots of separation and purification processes in chemical engineering.“
Silver may be found in electrical switches and solar panels. It is also used (because it is antibacterial) in a lot of surgical equipment.
How Do Gold and Silver Compare?
Silver and gold are each a sounder play than platinum or palladium for the broad purpose of helping an investor manage the risks of a portfolio, for the reasons Hazlitt set out. But how do silver and gold compare to each other?
Silver has what seems to be an obvious advantage for many. It is a good deal and more affordable on an ounce-by-ounce or coin-by-coin basis.
There is a more subtle point in silver’s favor. Institutional stockpiles of it are shrinking over time. Relevantly, silver stockpiles considered as a percentage of all silver ever mined are smaller than gold stockpiles as a percentage of all gold ever mined. Some investors may find in this a comforting assurance that the price of silver is not going to be undermined by a glut.
Relatedly, at contemporary prices for each of the ancient metals, the annual gold supply is 12 times bigger than silver’s.
But there are two important negatives investors have to consider before committing to silver. Its price is more volatile than gold. This raises the possibility that if one has to liquidate one’s position quickly for some reason, one will end up doing so in a trough created by that volatility. It can feel like a “fire sale.”
On the flip side, silver can outperform gold during times of higher industrial demand.
Silver and Storage
The second important negative: there are storage complications with the ownership of physical silver.
This is a granular matter often ignored even by careful analysts. There are at least three aspects to it. First, for any given amount of money you have invested in a precious metal, you have to own — and store — a lot more of it if you bought it in silver than if you bought it in gold. This is just the flip side of its greater affordability.
Second, though, gold is a lot denser than silver. An ounce of gold takes up more space than an ounce of silver. If you combine these two points and do the math, you find that silver requires 128 times more space than gold for a given dollar value.
Third, silver will tarnish in an environment that is not monitored and kept dry.
Every investor ought to study his portfolio needs with due diligence, of course, and conclusions will vary. It is safe to say, though, that many will reach the conclusion that the most suitable precious metals are the ones that have been prominent assets for the longest: gold and silver.
The relative assessment between those two is more difficult, but again, it is likely that many will reach the conclusion that there is room for each.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.