Commodity trading means that raw materials are bought and sold, not finished products such as home, stocks or bonds. Raw materials are assets such as corn, coffee, wood or ore. One common form of commodity trading is investing in precious metals, namely gold and silver. As investment assets, precious metals perform different functions in the portfolio. Silver is cheaper than gold, but the price of it is more volatile. The yellow metal is great for diversifying the investment portfolio as a whole.
There is no such thing as a "best" asset. However, it is better to buy silver if the world does not face an economic downturn or crisis. This asset can bring you additional income in such conditions. It is better to buy gold if an economic downturn is planned in the medium term.
Utility of precious metals
The main advantage of investing in precious metals is profitability. The value of most commodities is based on supply and demand. For example, to predict the price of coffee beans, it is necessary to analyze how much coffee people have drunk over a certain period, how much they prefer to drink at the present time, and then compare how their tastes change, etc.
Precious metals differ in that they have relatively low non-investment applications. Silver is more in demand in industry than gold. Gray metal is used in innovative industries. About half of all silver in the market "works" in dentistry, electronics and other sectors of the economy. This information is used by investors to forecast silver prices. Gold is widely used only in the jewelry industry.
Value and volatility of precious metals
There is a gap between gold and silver prices. Yellow metal is much more expensive than gray metal. This is partly due to the fact that silver on Earth is almost 20 times more than gold. This circumstance affects the preferences of investors.
First, investing in silver is much easier than investing in gold. Grey metal can be bought for less. It is more accessible to investors with modest capital. Still, low-cost assets tend to be highly volatile. Silver, for example, needs to change its price by just $2.57 an ounce to make it 10% volatile. If the price of gold had changed by $2.57, it would have meant it had changed insignificantly - by just 0.0013%. Volatility is not necessarily a bad metric. However, it should be looked at, especially when it comes to long-term investment.
Reaction of precious metals to fluctuations in financial markets
The dynamics of the gold exchange rate, as a rule, inversely correlates with assets in the stock market. Gold is a so-called "countercyclical asset." This means that precious metal becomes more expensive when the main assets become cheaper, and vice versa. Historically, when the stock market is stagnant, investors invest in gold. In contrast, with economic growth, investors tend to sell precious metals and redirect them to stocks and bonds.
Many investors hold gold in their portfolios specifically in case they need liquidity during an economic downturn. The fact is that the economic downturn is the worst time to sell stocks, but the best time to buy them. The presence of gold in the portfolio will help during the economic downturn to buy cheaper assets.
Silver quotes react sharply to a change in the economic situation. For example, when the growth rate of the economy slows, industry needs less gray metal to produce, leading to a decline in its rate.