Why is Gold more expensive than Silver?
Gold is widely recognised as one of the best hedges against inflation. The price of gold is close to Rs. 61k per 10g while that of silver is around Rs. 770 per 10g in India as of today. So why do you think there is so much of a price difference between the two precious metals and why one of them is talked about more when the topic of hedging arises?
There is simply more silver present below the Earth’s surface than gold. Silver is actually close to 18 times more than Gold, meaning that the supply of silver is very high when compared to gold. With that amount of silver available for extraction, mining companies can produce silver at a higher rate, therefore increasing its overall supply. By the laws of economics, when supply is greater than demand, price decreases.
Silver is used for more things. It has a number of industrial applications, while gold is mostly used for jewellery and investments. Silver has high electrical and thermal conductivity and good antimicrobial properties, which makes it a useful component in the production of medical equipment, solar panels, electronics and photography.
There is a lot of demand for gold, and in different types of markets. As I said in the introduction, gold is considered an excellent hedge against inflation (read more about inflation here). This means that governments as well as institutions or companies also buy gold to protect themselves against black swan events. Gold is also perceived as more prestigious due to its shiny colour and aversion to corrosion. The industrial uses of silver mean that the price of silver is prone to more fluctuations, and that is not the case with gold.
Production Costs for Gold are much higher. Extracting metals needs a lot of labour, transport and energy costs. So mining companies need to be able to reduce these costs as much as possible. One thing that is possible with silver is extracting it as a byproduct of mining other metals, such as copper, lead, and zinc. In fact, a major chunk of silver production is done using this type of “byproduct mining”. But with Gold, there is not enough metal, and enough profit margin that the process can be carried out with lesser efficiency, but since the process is difficult to carry out, it adds to the price of gold.
Gold was in fact once used as the basis for the major currencies of the world, which was referred to as the Gold Standard system. You can read more about how that was removed here. But this is not to say, silver is not valuable. It will most probably be more valuable than most other metals due to its properties over time, but it would likely never come close to the market cap of gold. Many experts say that we should all have both of these metals in our portfolios to hedge against inflation and in the unlikely but possible event of the collapse of fiat currencies of the world.
So do you plan to own any of these two along with other assets in your own portfolio? And while that’s it for this article, you can read more from here. And do let me know if you want a specific topic covered! Subscribe for free to receive more posts like this every day!