Gold vs. Silver: Which Is the Better Investment in the New Cycle?

Key Points

• Investors looking to beat the next currency and commodity cycle might consider how gold and silver are trading today.
• Historical ratios suggest that the upside is higher in silver than in gold, and certain mining stocks show the same.
• Bears and Wall Street analysts show where the most upside is with the least risk at the moment.

Over an economic cycle, it is no secret that a few asset classes tend to outperform the rest under the right fundamental conditions, something that investors can get behind to get their capital on what could be the winning side of history. With business activity slowing down for 21 months, according to the manufacturing PMI index, something new has to come around.

The Fed is looking to make that change soon by cutting interest rates, which could spark new business activity due to flexible financing and ample liquidity in the economy. According to the CME's FedWatch tool, the date is now predicted for September 2024, giving investors a reasonable timeline from which to expect these changes to come. Here's how interest rates could affect other market areas, like currencies.

Interest rates significantly drive currency valuation, so lower rates could weaken the dollar. While that's bad for some stocks, it is great for commodities. Any dollar-quoted commodity, like gold and silver, will see its returns amplified. The question becomes, which one? SPDR Gold Shares NYSEARCA: GLD and iShares Silver Trust NYSEARCA: SLV are good options, as are Royal Gold Inc. NASDAQ: RGLD and Hecla Mining NYSE: HL.

How to Choose the Right Metal for Investors: Gold or Silver?

After Warren Buffett became bullish on the future oil price through his 29% stake in Occidental Petroleum Co. NYSE: OXY, traders figured out that natural gas prices could eventually close down the price gap and catch up to oil. This is exactly what is set up to happen right now between gold and silver.

Investors can determine how overextended gold might be versus silver by following the ratio between the two ETFs. Each time this ratio spikes, buying silver as a catch-up play is the more profitable move, and that setup is happening right now after a recent spike.

The opposite is true during a trough when gold becomes the better option. After the recent trough in May 2024, it shouldn’t be a surprise to see gold hit a new all-time high in the past quarter. This is not a rule, however; it is just a statistical phenomenon that investors can take advantage of.

What is closer to a rule, though, is that commodities of all sorts could head higher on rate cuts. If silver offers more upside than gold, investors might look into it.

Apart from the silver ETF, there’s another way to invest in the metal: through basic material stocks or mining companies. Here’s a good example.

Wall Street Favors Hecla Mining Over Royal Gold After Reviewing the Ratio

Just like the silver ETF shows more potential upside versus gold, the mining companies that deal directly with the profit cycle in these commodities also show similar risk and reward profiles. In this case, Hecla Mining is silver’s representative, and Royal Gold is in the opposite camp, representing gold prices.

Wall Street analysts led the way in this spread, as their earnings per share (EPS) growth forecasts immediately favor Hecla over Royal Gold. They expect to see 140% growth in Hecla, significantly above Royal Gold’s forecasts for 25.3% EPS growth. Price targets also followed this trend, showing investors where the trend is headed.

Those at Scotiabank think Royal Gold stock could be worth $157 on a fair price target, calling for a net upside of 11% from where the stock trades today. On the other hand, Hecla Mining got analysts at HC Wainwright to place a valuation of $10.25 on the stock, daring the company to rally by as much as 64.5% from today’s prices.

What is interesting for investors is the way these two stocks have traded in the past year, as both are near their 52-week highs. This should be proof that the market is now becoming more bullish on silver, as the rotation could be getting underway in the coming months.

There are other ways to gauge how the market feels about these commodities, particularly about mining stocks. Investors can do this through valuation multiples, such as the price-to-earnings ratio (P/E). It would make sense to see markets pay a premium valuation for the company they expect to grow the most shortly, and that’s the case with these miners.

Hecla Mining stock is valued at 125x P/E today, which calls for a massive premium over Royal Gold stock’s valuation of 30.2x today. However, the shift in sentiment doesn’t end there; looking into bearish activity can also be a good indicator of where these two stocks stand in the eye of the market.

Royal Gold stock’s short interest rose 3% in the past month. In comparison, Hecla Mining stock’s short interest actually declined by 5.9% in the same period to show bearish capitulation in the face of the higher upside that could be had in silver instead of gold prices.