McHugh On The Markets

For the price relationship to remain fixed between Gold and Silver, the following chart should show one thin horizontal line. Instead we see rising and falling patterns that range from 40 to 100. What this means is simply that the price relationship between Gold and Silver is not fixed, varies substantially. Why? Because at different times, in vastly different market environments, the value of Gold is perceived differently than Silver. It is this relationship that speaks volumes to the risks of economic and political upheaval.

From 1990 through 1998, the value of Silver was rising in relationship to the value of Gold. This was due to a booming economy where, because Silver has industrial use, and not just numismatic, it was in greater demand. Gold was not viewed as important as a medium of exchange as there were few perceived going-concern risks to life as we knew it in the United States. No 9/11; no recent 38 percent drops in the Dow, or 80 percent drops in technology stocks; little perceived significant exportation of our manufacturing base (although it had begun); no record Budget, Current Account, or Trade deficits; no Patriot Act threatening our civil liberties, no $67 per barrel oil. Life was good. Silver was valuable relative to Gold.

But that has changed. From 1998 through 2003, starting with the Hedge Fund and Asian crises, through the Y2K scare and the economic collapse of 2000, through the start of the Iraq war, Gold began to be accumulated more than Silver. Suddenly Gold as money was deemed an important crisis commodity. As fear replaced confidence, Gold relative to Silver increased in value, doubling from 40 times Silver in 1998, to 80 times Silver in 2003. Then confidence grew as the War seemed at first to be successful, as the equity market rallied, as 9/11 drifted further back in the minds of people, and Silver once again increased in value relative to Gold - until early 2004. A presidential campaign brought our many problems into focus. Questions about the true state of the union were raised, in private and in public.

From early 2004 through now, the Gold to Silver ratio oscillated between 50 and 70, stabilizing and narrowing toward a mean of 60, which is about where we are now. The ratio's action since early 2004 has been indecisive. Are things getting better or worse? If this ratio rises from 60, this important and correct prognosticator is declaring tough times ahead. If this ratio declines from 60, expect improving times. After its considerable deliberation, it looks like we are about to be rendered the Gold/Silver verdict, as this ratio looks ready to break out of its trading range - to the north.

Even more than stocks, precious metals factor in political risks as well as financial. They adjudge the welfare of civilization as we know it. They offer stability amidst chaos, have for thousands of years. Kingdoms rise and fall, paper currencies disappear, businesses become obsolete, even the industrial use for Silver is at risk. Ultimately, the choice becomes, which metal would you rather have if the U.S. Constitution is abandoned for marital law?

So what is this ratio telling us on September 7th, 2005? Since June 2005, this ratio has increased 18 percent, from 55 to 65. This is a huge increase in a mere three months. It is telling us it is not happy about prospects. This rapid increase in the value of Gold relative to Silver is warning us of dangerous times ahead. Watch for a breakout above 70. That would start a new intermediate term uptrend, and spell major trouble.

The past two weeks, Gold is following the path we projected in our regular newsletter, issue no. 208, breaking higher from its corrective Micro degree wave 2 correction of 1 up. This is a wave 3 that is underway, so Gold should rise quite a bit over the next several weeks on its way toward $500. Not sure it will get all the way there before wave (1) up tops, but it certainly could as the top of the long-term rising trend-channel is above $500, and the primary degree waves have so far tended to kiss the upper and lower boundaries of this trend-channel. The key resistance level Gold needs to top to confirm the labeling we show is Minor degree wave 3's 456.87. After wave (1) completes, an A-B-C corrective decline should unfold, taking Gold back down toward the $400 area for (2). That could take 3 to 6 months. Then, a monster rally, primary wave (3) should take Gold toward levels that are unthinkable to the general public today, well over $1,000.

Rumors of Silver's demise are premature. Silver rallied from the brink, from an about-to-drown 6.70 on Wednesday to a close of 7.01 Friday, September 2nd. Silver was met by powerful resistance Friday, at the convergence of its 50 day and 200 day moving averages. It tried busting through, nearing 7.06 intraday. If it can, then the Symmetrical Triangle pattern that suggests an upward surge will be back in favor. All the fiat money being generated argues for Silver's success. Should Silver fail, it will likely mean it is diverging with Gold, driving the Gold:Silver ratio higher, which is a forecast of disintegrating economic and political stability in the United States.

"He who dwells in the shelter of the Most High
Will abide in the shadow of the Almighty.
I will say to the Lord, "My refuge and my fortress,
My God in whom I trust!"
For it is He who delivers you from the snare of the trapper,
And from the deadly pestilence.
He will cover you with His pinions,
And under His wings you may seek refuge;
His faithfulness is a shield and bulwark.
You will not be afraid of the terror by night,
Or of the arrow that flies by day;
Of the pestilence that stalks in darkness,
Or of the destruction that lays waste at noon.
A thousand may fall at your side,
And ten thousand at your right hand;
But it shall not approach you.
For He will give His angels charge concerning you,
To guard you in all your ways."

Psalms 91: 1-7, 11

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.