Silver or Gold?

Here’s something to chew on through your day: gold or silver?

The two precious metals have long attracted investors during times of crisis thanks to their status as safe havens during market fluctuations and hedges against inflation. Indeed, gold had a twelve-year-long bull run, which was thrown off in last week’s massive sell-off. And many have, in recent weeks, begun to speak of silver as the next big thing.

Silver’s had a respectable performance over the past year and continues to sell out in big numbers. But for central banks, it seems, the answer is clearly gold.

Last year, central banks bought up gold in the highest volumes since 1964. This occurred right before prices began their downward spiral, as investor uncertainty in gold’s historical safe-haven status began to reveal itself.

According to the World Gold Council, 2012 saw reserves increase by 534.6 metric tons, and this year should see worldwide purchases of between 450 and 550 tons. That’s a likely value of $25.3 billion we’re talking about.

However, since gold’s September 2011 peak of $1,921.15/oz, central banks have suffered steep losses—to the tune of nearly $560 billion in value. In other words, central banks have been getting it wrong quite often.

Bloomberg provides an expert’s insight:

“They sell at the wrong time and buy at the wrong time,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “They aren’t traders. They are looking at it as a long-term holding, as an ultimate reserve currency. With the benefit of hindsight, they tend to get it wrong more often than not.”

This year, gold is down 12 percent, hovering around $1,467.90/oz. In fact, Goldman Sachs Group Inc. (NYSE:GS) expects prices to drop as far as $1,390 within the next year.

Turmoil in Europe

What’s of concern here is that banks continue to print money in rather desperate efforts to revive growth. Europe’s problems are nowhere near a solution; if anything, things are likely to worsen after a surprise disappointment from Germany, whose PMI numbers were less than expected.

The Cyprus chaos recently rocked international markets, and even the International Monetary Fund has begun to put on a dour face. You would think, amidst such crisis, investors would flock to the traditional safe haven: gold. But the only entities who appear to continue buying up gold now are the central banks—the ones with a much longer view than most investors.

The present slump in prices is likely not a major concern for central banks since they’ll hold on to these assets far longer than investors do. Here’s Rachel Benepe of New York’s First Eagle Gold Fund, explaining the oddity to Bloomberg:

“Central banks are strategic investors, and look at it as the currency of the last resort that lenders will gladly take. When there are any big moves, investors get panicked. Nothing has changed from our viewpoint. Gold is a hedge against policy actions, and governments globally are announcing policies that are unproven.”

In short, then, from the perspective of long-view central banks, there isn’t much of a problem. Their purpose in buying up gold is different from that of individual investors, and that’s why they can afford to ride out the present period of depressed prices while investors see their investments in gold suffer.

A Turn Toward Silver

As far as individual investors are concerned, the answer is silver, at least according to The Morgan Report’s and Silver Investor’s David Morgan.

For one, silver is relatively inexpensive and easier to transport. Per unit, its value is less than gold’s. Yet it has far wide applications. Currently, silver is around $23/oz on the futures market. For these reasons, Morgan sees silver as the ideal metal when it comes to alternative currency.

But the big problem with gold is its relative lack of functional use. Silver is widely used in many industries, and thus it is actually far more “necessary” than gold. That’s why buying up silver on the cheap could provide big returns when industries pick up and silver prices inevitably go up.

Thomson Reuters GFMS, for example, asserts that more than half of silver’s annual demand goes toward satisfying industry needs. And it isn’t just industry, either; investing in silver is now making a far surer bet for many.

The world needs silver more than it needs gold, and when the world economy begins to seriously move forward again, you can be sure it’s silver that will benefit far.

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