The difference in gold bugs and silver bugs is really derived from the difference in the two metals. Milton Friedman once said, “The major monetary metal in history is silver, not gold.” Although Friedman was wrong when he claimed the price of gold would collapse if it was no longer used to back the dollar, he is direct on with this quote. Gold has significantly larger monetary uses than silver and silver has meaningfully more industrial applications than gold.
For the most part, gold bugs are cynics of government regulators. They doubt the intentions and morality of global monetary authorities. Gold bugs buy the metal because they believe it cannot be inflated. It’s one of the only assets left in the world that is nobody else’s liability. In other words, mining is to gold as the printing press is to paper currencies.
Silver bugs on the other hand tend to be less focused on the “financial Armageddon” idea. This is because silver has significantly more industrial and commercial uses and these applications make up a much more noteworthy portion of demand than they do for gold. Demand for monetary use accounts for 7% of silver (Silver Institute) compared to gold’s use as a monetary vehicle making up 30% of consumption (World Gold Council: Demand Trends). With that in mind, silver bugs have to be less bearish on economic outlook because a larger percent of future silver demand is dependent on dips and rises in economic activity. If they were extremely bearish on the economy and monetary inflation they would be gold bugs.
Silver and gold bugs have their differences, but they have common ground as well. Both are buyers of the metal because they believe at least some sort of monetary inflation will ensue. There’s an obvious correlation between price movements in the metals. Each “bug” often uses spreads between the two as a trade.
This spread for the most part has historically trended between 60 and 40. Recently, like many historic price ratios, this ratio between silver and gold prices has gone to new targets. Both gold bugs and silver bugs trade this ratio both ways, but each has a different general outlook going forward. The gold bugs believe that gold will continue to outperform future silver prices and will push this ratio to and beyond triple digits. They hold this belief because they expect monetary authorities to continue their quantitative easing while economic conditions deteriorate. If that happens, gold consumption for monetary uses will possibly make up a higher percentage of demand and will represent that by outperforming future silver prices whose demand has a more cyclical nature. Silver bugs in turn believe the opposite. They believe that the lower interest rates and money supply growth that has taken place will help turn the economy around, but will still have inflationary implications. In that case, the future silver price will outperform the price of gold going forward.
Gold and silver bugs have a similar belief set, but their differences lie in the details and forward looking economic perspectives. We’ll learn whose outlook turns out to be right.
Silver Basics
