Gold vs. Silver, Round 2 - Store of Value vs. Value

Jun. 07, 2011 9:35 AM ETGLD, SLV, ZSL27 Comments
Galt's Gulch profile picture
Galt's Gulch

Many people believe that gold stands to gain much more than silver. I don’t believe this to be the case, and it’s not a matter of calculations or math; it’s a matter of definitions and common sense.

Many people confuse store of value with value – there is a huge difference. Let us use the following comparison. Gold is like a bottle, and value is like water. The bottle is worth something, as is the water. Silver’s just a smaller bottle. Both are stores of value which contain value – two separate concepts.

I can agree with many goldbugs that gold is a better store of value (which is the only reason to trade silver for gold). However, that doesn’t make it a better value. For example, let’s take 1000 shares of Hecla Mining (HL). Now, knowing that it has gone from $1.00 in 2008-09 to $7.90 as of today, which was the better value? At the end of the day, which object would allow you to buy more real goods on the market?

Similarly, if silver has gone up 9x since 2001, and gold has only gone up 5x, which is the better value? Clearly many things that are better values than gold.

And that leads to the next point : Arbitrage. If I can get just 500,000 ounces of gold, I can control the world silver market at current prices – unless other people decide to bid the price of silver up so that they too can get silver. Therefore, silver’s price must rise until it reaches a fair value against gold – no matter how high that means it must go.

This occurs because gold’s primary value is that it’s a great store of value while other goods (including silver, to some degree) have to compete on the basis of

This article was written by

Galt's Gulch profile picture
The author is a financial professional based in NYC with an investment research background. He is not a RIA.

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