Abigail F. Doolittle | abigail@peaktheories.

com

November 19, 2010

The Weekly Peak

Gold/Silver Ratio: Silver Going Higher?
In this world of blossoming government debt, we’ve seen the price of both gold and silver in U.S. dollars increase tremendously over the last ten
years as investors have flocked to these precious metals as a hedge against potential weakness in fiat currencies.

Interesting, however, is the fact that unless the price of gold collapses, the gold/silver ratio may suggest that the bull market for silver has only just
begun.

What the Gold/Silver Ratio Says

The gold/silver ratio represents the number of silver ounces it takes to buy a single ounce of gold. Up until about the last 200 years, silver has sold
for about 16 ounces for each ounce of gold or a ratio of 16/1.

• 323 B.C. – The ratio stood at 12.5 upon the death of Alexander the Great.
• Roman Empire – The ratio was set at 12.
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• 12 to 17 Century – The ratio was around 12.
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• End of 19 Century – The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era and England’s attempt to
demonetize silver and conceivably because the country had little of the precious metal.
• 1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.
• 1991 – When silver hit its lows, the ratio peaked at 100.
• 2003 - 2007 – This part of the bull market in silver caused the ratio to drop to 45 from 80.
• 2008 – The ratio rose back to 80 on the Great Recession.

And where does this ratio stand today relative to its rough historic ratio of about 16?

While it’s come down significantly from 80 in 2008 and with much of that move having been made in the last few months alone, the gold/silver
ratio stands at 50 today.

If the ratio continues to correct back to its approximate historic level, it seems that the price of silver is likely to continue higher and perhaps
much higher.*

Fundamentally, there are many reasons to believe that the price of silver is likely to continue to rise (Is Silver the Next Gold? – September 17) and
the very thing, in part, to cause a declining gold/silver ratio.

Putting aside those fundamentals for today, however, what does the chart of the gold/silver ratio say?
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Frankly, the picture is mixed but with a silver lining.

Part of the reason the picture is mixed is because the trend in this 30-year monthly chart is up.

Putting additional emphasis on that upward trend is the fact that the gold/silver ratio is dangerously near its trough level of support of the last 13
or so years of about 45. There may be reason to think this level of support will continue to hold from a strictly technical perspective and this would
mean that the gold/silver ratio would bounce up from about 45.

However, the current ratio is nowhere near the real trough made in the early 1980s with the true low of 17 hit in 1980 as was mentioned above. In
th
addition, if this ratio is charted out in a truly long-term chart from the beginning of the 12 Century, and such a chart does actually exist, the “pull”
of the chart is down and to that historic average ratio of about 16.

Also, the near-term trend, as you can see by the recent plunge down in the gold/silver ratio, is very clearly down as is the trend down by the
narrowest of margins over the last 20 years.

Perhaps it is fair to believe, then, that this ratio is more likely than not to continue to decline considering that is what more of the time period
trends suggest.

However, the real sign of a possible continuation of that decline shall come if and when the gold/silver ratio pierces through that rough trough level
of about 45. If this “silver lining” should occur, if the gold/silver ratio level breaks below 45, there is good reason to believe it will continue to fall
considering there is no support between 45 and its significantly lower level found in the early 1980s.

In turn, if the gold/silver ratio does break 45 and continues to decline as the price of gold holds steady or increases, there is excellent reason to
believe silver’s going higher and that its bull market has only just begun.

Sam’s Stash, Gold, and the S&P

Treasurys have declined in price since last week with the 10-year yield at 2.90% and up from 2.65% just a week ago.

As I have been writing about for many weeks, I think we will see this trend of rising Treasury yields continue in the near-term and I expect that we
will see the 10-year go above 3.0% and perhaps close to 3.5% if not above that level.

My reasoning around this dynamic remains the same as it was last week.

• An unwinding of the “invest in what the government’s investing in” trade with current yields offering investors virtually nothing.
• The precedent of QE1 would suggest yields are likely to move up on the prospect of potential inflation risk.
• Rational investors are unlikely to remain in securities (7-year and shorter) that offer no real return for long.

I will take up this topic in more detail in the next week or two.

Turning toward the dollar, I continue to believe that the dollar index is likely to decline.

As I have been writing about more recently, it seems that not only is the dollar index caught in a confirmed Descending Triangle, it may be starting
to play out a potential Broadening Top. Both of these patterns are negative reversal patterns and thus suggest a decline.

November 19, 2010

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The Broadening Top confirms at 75.62 and its target is below 73. The Descending Triangle’s target is a little lower than 71.

Taken together, these patterns would suggest the dollar index is likely to resume its decline and the fundamental factor to force such a move down
is the EU/IMF/ECB forcing Ireland to accept bailout money of some sort to shore up its banking sector but more so contagion fear. This is ironic for
a number for reasons but also a topic for another time.

Such a decline, of course, is likely to be the very thing to propel the precious metals higher and the trend of both gold and silver is undeniably up
as was shown on the first page.

But in keeping with the theme of silver, it seems that the shorter-term charts suggest, as does the chart of the gold/silver ratio, that silver is at an
inflection point of sorts.*

Specifically, silver spiked up recently on a modest church spire top.

The problem with such a spike up is that it often augurs a spike down and far below the valley that was found this past week. However, it does not
guarantee it and such a spike up is in the context of a strong Uptrend in both the 6-month daily and the 3-year weekly charts as would be an
opposite spike down.

In other words, a possible spike down in silver would be warded off to some extent by that Uptrend.

Overall, I am cautiously constructive on silver based on looking at these charts only – in other words, disregarding the dollar and other
fundamentals – which are both supported by that 30-year monthly chart on the first page.

If silver trades choppy between $23 per ounce and $30 per ounce, it may signal the possibility of that spike bottom. This type of trading, should we
see it, can be cross-checked through the gold/silver ratio chart to determine a trading strategy and investment stance.

November 19, 2010

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The key for me to become outright positive on silver based on looking at its near-term charts only is to see silver climb convincingly above $30 per
ounce even if it were to simply trade flat at that level for some time. For if silver climbs above $30 per ounce for any period of time it will
consolidate that spike and negate the likelihood of a reactionary spike bottom.

In turn, such a potential move higher in silver seems likely to be the thing that could bring the gold/silver ratio lower and both such moves seem
predicated on a declining dollar should it move down.

So too is a declining dollar likely to provide the S&P 500 with some new energy to maintain its current Uptrend and to attempt to climb higher in
choppy trading after falling back on itself this week into a strong range of support found between 1,167 and 1,188.

And new energy it shall need for the S&P is looking a bit tired and its charts a bit precarious.

The potential Double Top that I have mentioned a few times is rather obvious regardless of time frame and this pattern would confirm at 1,011
while its target suggests a double digit percentage decline.

Perhaps to the positive, however, the S&P did find some fuel yesterday in a modestly soft dollar and moved up more than 1.5%.

In turn, this may have helped to continue the set-up of a consolidating Triangle pattern that could provide the support for the index to move higher
and to fulfill the confirmed Inverse Head and Shoulders pattern by moving through its target of 1,250.

The common theme to the index’s trading action since the announcement of QE2 is volatility and so it seems we’re likely to see more of yet until it
gives way to the future of the immediate-term trend. For that’s what’s being fought for now because the near-term trend is still up as is the
intermediate-term trend.

The long-term trend, however, remains very much down and it is for this reason that we must monitor the S&P’s current near- and intermediate-
term Uptrend with care.

S&P Targets and Qualitative Views for Various Time Periods November 19, 2010

3 to 6 Months 1,300 Constructive

6 to 36 Months TBD TBD
36 Months+ 425 Bearish

As always, thank you for taking the time to read this week’s piece.

*As a point of disclosure, I own SLV or a silver-based ETF in my own account.

November 19, 2010

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November 19, 2010

Please see important disclosure statements at the end of this document. www.peaktheories.com