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Investing in China Silver

Why I Recommend Gold over Silver

Written by Geoffrey Pike
Posted May 11, 2015

chinasilverAccording to the Silver Institute’s annual World Silver Survey, the demand for silver bars in China was down 52% in 2014 from the previous year.

When demand drops in half for anything, then something is going on.

Total global demand for silver bullion was down by 31%, but there's obviously something even bigger going on in China.

A portion of the drop in demand is being attributed to a so-called anti-corruption policy in China, but this probably doesn’t tell the whole story. Also, to put this story in perspective, this drop in silver demand is being compared to 2013, which was a record year.

I think this story is more interesting when put in the context of gold.

China continues to accumulate more gold. Perhaps demand is waning a bit for gold, but it still seems to be strong. This would include the Chinese people and the Chinese central bank.

Of course, one major difference between gold and silver is that central banks do not hold silver as part of their reserves, at least that we know of. Central banks hold gold reserves.

While China is still holding something in the neighborhood of $1.2 trillion in U.S. Treasury debt, it seems the central bank is trying to diversify its holdings, at least a bit. So it is no surprise that it's a buyer of gold.

Another difference between gold and silver is that silver is more of an industrial metal. They both have a history of being used as money. They can both be used for jewelry. And both have their industrial uses. But silver is more industrial and will also tend to be a bit more correlated with the overall economy.

If the weakening silver demand in China is any indication, then the Chinese economy is on a weak footing, which I believe is the case anyway.

There's a massive real estate bubble and a stock bubble has formed just within the last 6 months. Sometimes there are other signals out there indicating a coming recession and silver may be one of those warning signs.

Investing in Gold and Silver

This is why I generally recommend investing in gold over silver. I like both in their own ways, but for the precious metal part of your portfolio, it's better to have at least 5 times more gold than silver.

Silver actually has a greater upside potential. If we have high price inflation with a new bull market in metals, silver is likely going to outperform gold.

But gold is less of a roller coaster than silver. Silver is far more volatile, which means it gets ugly during downturns. And if there's going to be a recession, whether in China, the U.S., or elsewhere, the price of silver is likely to take a hit as a result.

The main purpose of investing in gold is to hedge against disaster and to hedge against high inflation. It serves its purpose in this respect. Silver is a decent hedge for these adverse events as well, but there seem to be more factors at play. In a wild economy, such as what we’ve had for the last several years, gold is going to provide more stability than silver.

In economics, it's always important not to confuse cause and effect. As the saying goes, a wet sidewalk doesn’t cause rain. But sometimes it is difficult to determine the cause versus the effect.

Is silver demand in China weakening because the economy is weakening? It's probably safe to say that the economy is not weakening as a result of weakened demand for silver. But perhaps the two things are just not correlated in this particular instance.

The Chinese bubbles are going to pop sooner or later, regardless of what silver does. So the question is what silver is going to do when the Chinese bubbles pop.

In addition, while China is a major country, it does not necessarily determine the global demand for silver, along with the final price. However, it's reasonable to think that a recession in China will likely mean a weakened global economy.

In terms of the price of silver in U.S. dollars, Federal Reserve policies will have a bigger impact than the demand for silver for industrial uses. If anything, Fed policy may end up increasing demand for silver just because of investors seeking protection.

The Fed has stabilized the monetary base for now, but what happens if it ends up returning to another round of money creation? The increasing money supply is going to have more of an effect than a change in demand for silver on its own.

Silver is going to have its day in the sun again. For now though, gold seems to be the safer bet, especially if Chinese demand is any indication.

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