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November 22, 2005

Food For Thought
by David Petch

The chart below illustrates the average price of gold silver and gold/silver ratio since 1833. Data prior to 1970 for gold is not useful, due to fixed pricing set by the US government. The price of silver fluctuates over the course of the past 160 plus years due to it being viewed as an industrial metal. The gold/silver ratio peaked around World War II and subsequently declined until the bull market in the stock markets ended in 1966. This 26 years of time saw the gold silver ratio decline due to increased demand in silver initially for world war efforts and subsequently from an overall bull market in the broad indices.

The gold silver ratio subsequently rose and declined to correspond to the 1980 market top in the commodity bull market, exacerbated by the Hunt Brothers attempt to corner the silver market. The gold/silver ratio peaked below 100 between 1980 and 2000, subsequently declining. The gold/silver ratio has a domed decline if top lines are joined together. This suggests that the price of silver will rise relative to gold for the next 5-7 years. All of the prior lows in the gold/silver ratio involved significant abundance of silver above ground. The current point in time however has a situation where more gold exists above ground than silver. With the number of slotted uses for silver growing each year, the supply deficits will keep on growing until all above ground supply is depleted.

I have read there is a 6-8 year above ground supply of silver left, which translates into a maximum cap in the price of silver for another 2-3 years. After that, silvers scarcity will shoot up the price. Historical gold/oil and silver/oil ratios peaked around 20 and near 1-1.2, respectively. Both of these ratios are out of line and should at least see $600-800/ounce gold and $20-25/ounce silver with very conservative values representing 50% of the bull market tops in the ratios. When gold goes parabolic, it will do so in a hurry, along with silver. The chart shows no parabolic stage in gold or silver yet, but that will be the starting point of the parabolic blow off.

A few weeks ago, someone referred to a quote I had on gold, where I said the market was manipulated, thereby producing counts, which could be questionable. I should give further reference to my explanation. I do not think a proper gold count can be applied due to government price fixing. In order to have a truly valid Elliott wave count, it is best to examine indices where the majority of the population can have their behaviour captured in the tape. Examination of the HUI and other PM indices capture the behaviour of traders and market conditions, which IMHO give a better indication of when the precious metal markets fly.

Figure 1

Note: I have been asked by several people to post an update of the AMEX Gold BUGS Index count. Maybe in the future, but that content is for subscribers only at present.

David Petch
TreasureChests.info

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