These are some of history’s great relationships and great success stories. They are individuals coupled because they work together, make sense and have done so since before most can remember.

Gold and silver have remained in love for so long because they have so much in common: both are precious metals historically used as currency; both have gradually evolved into archetypal safe-have assets; and both are favourites of the jewellery trade.

Gold is the Batman and silver is Robin in all these applications, but then silver has far greater utility, with the industrial use for gold and silver today standing at about 10% and 50%, respectively.

Silver, for the uninitiated, has an uncanny spectrum for use, though has principally been applied to photography and electronics – beyond its consumption for jewellery.

“It’s malleable, it’s ductile, it’s beautiful and it’s versatile – it’s the most indispensable metal known to humankind,” Michael DiRienzo, executive director of The Silver Institute, said in an impassioned, if biased, pitch a few years back. “Silver is the best metal.”

Apart from industrial use, the other key difference between the metals is their production profile. Gold is generally produced as a primary metal, whereas silver is a by-product of copper, lead, zinc and gold production. In 2015, just over 70% of silver came from mines built to dig up something else.

Despite these disparities, the two metals have remained inseparable since Roman times when they were both monetised. But arriving at a value for both, and therefore a ratio on value, has rarely been straightforward.

According to silver and gold’s natural occurrence in Earth’s crust, the ratio should be 16:1, which is around what it was in Roman times. Today, that would see the silver price at something like US$82.50 per ounce, rather than $18.32/oz, where it’s actually resting.

Based on mass, the ratio should be 20:1. Based on the number of atoms, it should be 40:1 (because a gold atom is approximately twice as heavy as a silver atom), according to Edison Investment Research mining chief Charlie Gibson, a trained chemist-cum-analyst.

Recently, in historical terms, the ratio has completely disobeyed the laws of nature and fluctuated wildly from between 20:1 up to 100:1, generally increasing over time. Taken since 1792, the average ratio is 33:1 but from 1862 is 41:1. 

Part of the problem for silver was its demonetisation by governments from the late 1800s through to the 1930s, when China finally pulled its silver coinage from circulation. For years, the markets knew central banks held an abundance of silver but not how much. That silver bled out into the markets over time, holding back performance. Silver was at $1/oz in the late 1800s and just $5/oz almost 100 years later.

Somewhat counter-intuitively, the official demonetisation of gold – demonetisation of gold started in the 1930s but US president Richard Nixon’s move to release the gold fix in 1971 marked the culmination of that process – had the opposite effect. Gold famously ran from the $35/oz fix in 1970 up to $850/oz in January 1980 before capitulating and dropping back to the $200-400/oz range until the turn of the century.

The average silver to gold ratio from 1971, when both metals were free to trade, is 57:1. However, the widely used ratio when modern precious metal investors speak about the relationship between silver and gold is 63:1.

Since the release of the gold fix, the relationship between silver and gold has continued to be an intense one, with a correlation of 0.95. But while maintaining their historically tight bond, the proliferation of precious metal investment derivatives, particularly in gold, that have been allowed to flourish in a free system, have introduced a contemporary range of nuances that apply to the silver-gold ratio.

“Silver is sometimes used as the play thing in parts of the markets and when things get bad you can see some big movements,” Ross Norman, chief executive officer at bullion broker Sharps Pixley, told Mining Journal. 

Erica Rannestad, senior precious metals analyst at Thomson Reuters GFMS, agreed, suggesting silver was often used as “leveraged exposure to gold” by investors who wanted gold performance over a short space of time.

The issue for silver longer term is that volatility is not an attractive quality for many investors.

Norman said: “Speculators cause this volatility and, if they push the price higher but don’t see any follow-through buying, they’ll reverse their positions very quickly – and may even short it.

“Both silver and gold have precious metal, safe-haven status but that is the primary role for gold, whereas silver has a dual industrial use and so in times of extremis, gold is the clear choice and so it performs more strongly overall in those conditions.”

And so what we tend to get in terms of the silver-gold relationship are two extremes.

At one pole, is a situation of severe economic and geopolitical uncertainty, during which investors run to the ultimate safe-haven asset, gold. These periods also naturally give rise to sluggish economic growth, if not recession, and so silver’s dual use as an industrial metal discounts its safe-haven demand.

Hence gold performs strongly and silver is weak and the ratio is high.

At the other pole, is a situation of economic growth during which industrial demand is healthy and silver’s industrial applications are a key driver to its price. These periods also naturally coincide with economic and political stability and so gold’s primary role as a safe-haven feels obsolete.

Hence silver performs strongly and gold is weak and the ratio is low. And there is everything in between. 

There is also an attempt to substitute silver in industrial uses when it runs too far on investment demand, and a natural switch from gold back to silver for safe-haven investors when the primary safe-haven asset pulls ahead by too much and the secondary metal then provides a more affordable option.

These have been the laws governing the silver-gold relationship for about 35 years and they can be used to reason the run up in the ratio.

As one might expect, the ratio rose in 2008 and into early 2009 to above 80:1 as investors ran for cover from the worst economic meltdown since the Great Depression. 

A sharp drop in the ratio followed in 2010 to a ridiculously low 31.68:1 as the Chinese stimulus story drove industrial demand. Copper over the same period went past $10,000 per tonne. 

That low point also marked the start of a steady increase in the ratio over a prolonged six-year period during which gold and silver have started to look less like Romeo and Juliet and more like Nigel Farage and Jean-Claude Juncker.

“The dual-nature of silver really boosted prices back in 2005-2010, barring the financial crisis, but then those factors have been a disadvantage more recently,” Rannestad said. 

“Four years ago, the emerging economies were doing well. Europe was struggling but the economy was almost desensitised to problems there. Roughly two years ago, that shifted as the Chinese economy started to slow down and the market started to change its view on global growth. 

“[Precious metal] prices have been in a multi-year declining trend and silver has been leveraged – it has declined at a more significant pace than gold,” she said

This has widened the gap between the metals and so increased the ratio.

Adding to this fundamental driver pushing the ratio higher has been a structural shift in silver’s industrial use, which Rannestad said was struggling to find a firm footing.

“Another factor that has hurt silver is a structural change to its industrial applications, particularly the electronics sector, which accounts for a sizeable amount of industrial demand,” she said.

“The continued miniaturisation of electronics, meaning fewer components and lighter components, has hurt silver. As has the shift away from computer sales – we enjoyed a 30-year period of growth in computer sales but we have seen the onset of a decline as tablets takeover, which require less precious metal.” 

GFMS expects another three years of declining computer sales, though miniaturisation is expected to be behind us. Silver nitrate and halides in photography have also rapidly declined due to the lower demand for colour film since digital technology burst onto the scene.

And finally, there has been the production story. 

Gold miners have to some degree been criticised for failing to increase production in a meaningful way during a 10-year period in which gold increased in value by some 150%, including a brief trip up to $1,923/oz in 2011.

Silver miners on the other hand have seen production sky-rocket based on its profile as a by-product metal and the mass output of base metals over the boom. Only recently have forecasters suggested we may see a year-on-year fall in silver production. This has led to over-supply.

Do they need counselling?

After coming down off a recent high of just over 83:1 in mid-February, the silver-gold ratio at the time of writing was around 72.5:1 as silver’s gains outpaced gold’s. Silver bugs and those who like to believe in the modern-day ratio would suggest the trend is bringing the metals closer together at the modern-day average of around 63:1.

Brendan Cahill, chief executive of Mexico-focused silver producer Excellon Resources, told Mining Journal the consequence of silver leading gold lower since 2008 had meant prices were insufficient to bring on new primary mine supply, which would at some point combine with growing applications for silver headed by photovoltaics, which are essential for solar energy.

These influences should soon come through on both sides of the supply-demand equation.

Cahill received strong support on this argument from DiRienzo, who highlighted the green energy boom’s continued push despite general economic headwinds. Solar is shaping up as a key component in the renewable energy configuration potentially giving silver a boost during this current period of economic decline.

He also claimed previous attempts by industrial users to thrift away from silver when prices rose on investment demand had been only moderately successful.

“At the end of the day, they always come back to silver,” DiRienzo said. “The silver story is one that is pushing toward the upside.”

Rannestad, however, is not convinced we’ve experienced the standard upward fluctuation, which is necessarily being followed by a downward move.

“The ratio has scope for decline, but I think there is a lot of risk in forecasting that because I think we’re dealing with an economic regime shift – there’s no real grounds to suggest a divergence to a norm,” she said.

“We’ve seen a decline in the ratio and I think it was due. But I don’t see it getting back to the historical average.”

Norman said part of this current change in the fundamental silver-gold relationship could be tracked back to the introduction of exchange traded gold funds 13 years ago, which forced the investment portion of gold demand up from 85% to 90%, which is material.

Meanwhile, Gibson said regardless of any change in regime or the dynamic of the relationship, the fundamentals were also working against a happy reunion for silver and gold.

“Industrial growth was not that strong going into last week and with Brexit it’s only going one way,” he said. “Countries that weren’t going to be in recession now might be. 

“So it looks like a monetary crisis coupled with weak and uncertain economic outlook and in those conditions you would have to think gold will outperform silver even from the relatively high ratio we are currently seeing.”

Of course, a lagging silver price, or high silver-gold ratio, is a Hollywood problem for silver producers right now as conditions create the brand of economic extreme described above in which precious metals thrive.

Taking this a step further, there is now, more than any time since the explosion of the precious metals derivatives market, the possibility of a reset in the gold price to reflect physical stock. That would couple, as always, with a reset for silver.

It is generally accepted in precious metal circles the quantity of paper-traded gold vastly surpasses the physical gold in vaults, which is meant to underpin paper trades. Some suggest as little as 5% of the paper traded on COMEX could be produced if investors attempted to cash in their chips. 

It has also been equally accepted that while this may not be an ideal situation, it works because most investors don’t actually want to hold gold. Rather they trade their paper for profit and so it is unlikely to come to bear that holders of paper will attempt to take delivery of physical gold en masse. 

However, in a world where England is making a painfully slow exit from the European Union, Donald Trump is potentially the US president, growth forecasts for a fragile global economy are flat (potentially negative), and geopolitical tensions are high, a greater percentage of investors may feel better if they can sleep with their gold bars underneath their pillow.

“The possibility of a run on physical gold settlements is more likely in times of crisis than other times, and so you’d have to say it’s more likely now than previously,” Gibson said.

“You could get the mother of all short-covering rallies and that could reset the spot gold price at a level that is supported by physical stocks.”

That reset has been estimated at various levels, but the most common figure trotted out is about $3,000/oz. Based on today’s silver-gold ratio, that would mean a silver price of $41/oz. At those price levels and with the average all-in sustaining cost of silver production at around $12/oz, the ratio truly becomes academic.

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