Interest, in silver

Guest Post by GM Jenkins

When we talk about the price of silver, we are of course talking about a ratio: how much the world values an ounce of silver compared to how much the world values a federal reserve note (FRN). Right now, the world's population values an American Eagle about 40 times more than it values a benny buck.

Other ratios might be more illuminating, however. For example, at any point in time, instead of swapping x FRNs for z ounces of silver, you can swap x FRNs for treasury notes and get x+y FRNs back in 10 yrs. What does the ratio of z/y look like?*

Note how well the lower two trend lines capture the movement of this ratio for the entirety of the decade's bull market ... until the center trend line was finally broken for good last August (see grey dots).

Note also that the ratio was a leading indicator: it started its steady ascent in April 2010, four months before the dollar price of silver did. In fact, only when the ratio broke through the center trend line did silver's August 2010 price explosion begin (see grey dots).

Note how the ratio tested the center trend line during "Turd's Bottom" in January 2011, and how previous resistance became support (whereas the center trend line had failed as support in 2008). That's when the ratio blasted past the upper trend line, only to come right back down to it, where it hovers today. Thus, this chart gives you information that the silver price chart doesn't: a clear demarcation of 2 phases of the silver bull market: the period from 2001 through Fall 2010, and everything afterwards.

Finally, note how tightly this ratio tracks the price of silver. It's doesn't have to do that (e.g. 2003 - 2004, or 2009 - 2010), and it's not intuitively obvious why it does when it does. Are we looking at the fingerprint of manipulation here? I'll have to think about this some more.

*Actually, doesn't allow two ratios, i.e. z/y = z/x : y/x, so my chart depicts x/z : y/x (since x/z is just silver price, and $UST10Y a proxy for y/x). Similar idea. I'd like to see z/y if anyone can do that (i.e. ounces of silver per dollar divided by $UST10Y) .


GM Jenkins said...

I should've added that the $GOLD:$UST10Y or the $COPPER:$UST10Y charts (for example) don't track their respective metals closely at all. What's special about silver?

Louis Cypher said...

I'm thinking the disconnect or your grey dots may coincide with Pimco leaving Benny to buy all the bonds himself. It was about that time if memory serves.

Louis Cypher said...

Found this posted on posters paradise
From: Stansberry Research

Now, try to arrive at any sort of scenario that ends well for today’s U.S. Treasury
bond market investors. We can’t…

For the last nine months, the Federal Reserve has been purchasing 70% of all the
debt issued by the U.S. Treasury. What happens when the Fed stops buying? With
70% less demand for Treasurys, we expect prices to fall. Benchmark interest rates
will rise. Bill Gross agrees, which is why he’s shorting Treasurys. Higher benchmark
interest rates – perhaps sharply higher should cause the U.S. dollar to strengthen
against foreign currencies (like the Euro) and against commodities. It should also
cause most U.S. stocks to fall.

61% of all the marketable Treasury debt held by the public will mature
within four years. Thus, over the next four years, the U.S. Treasury must either repay
or refinance more than $1 trillion in existing debt each year – not to mention
additional deficit spending of at least $1.5 trillion. For us to avoid a default , the
U.S. Treasury may have to borrow or refinance as much as $10 trillion in the
next four years.

The Dynamics of a Bond Market Collapse
How much could rates rise?

Over the long term, the average real rate of interest on U.S. sovereign debt has been
around 2% a year. The latest Producer Price Index (which we believe is more reliable
than the Consumer Price Index) shows price inflation is currently 6.8% annually. Add
the 2% real return we believe investors expect, and you get 10-year Treasury bonds
yielding 8.8%. Currently, those bonds yield only about 3.25%.
This implies a huge collapse of bond prices – a collapse of more than 50%. A collapse
of that magnitude would completely wipe out the stock market. It would be a

No one is expecting any of this. Everyone believes something like this could never
happen. Yet this rise in interest rates would only carry us to the average return bond
investors have earned over the last several decades. It doesn’t even consider the
kind of panic selling that would ensue.

Loss of confidence
In truth, rates might go considerably higher than this for one fundamental reason. If
the bond market crashes, investors would begin doubting America’s ability to finance
its debts, never mind trying to repay them. As rates rise, the cost of maintaining our
debts would grow substantially – perhaps doubling.

Keep in mind, the U.S. Treasury currently pays only 1.4% annually to borrow $14
trillion. Yes, 10-year Treasurys currently yield around 3.25%. But because the
Treasury has issued so much more short – term debt than long-term debt, U.S.
borrowing costs are lower.
May 2011: PSIA – The Day the Dollar Dies Page 7 of 20 5/13/2011

Louis Cypher said...

No, all of our debts wouldn’t “reset” to higher rates overnight. But the losses in the
bond market, the losses in the stock market, and the resulting decline in business
activity would cause a lot of our creditors to worry about our ability to afford higher
interest payments.
Think about it this way. By the end of 2012, our national debt will likely exceed $17
trillion. Let’s assume our average interest increases to 4.4% – half the rate we
believe investors will eventually demand. That works out to an annual interest
expense of almost $750 billion. That’s more than we spend on defense or Social
Security. Interest expenses would leave the government spending almost 25¢ of
every dollar on interest payments.
Does that sound wise or reasonable to you? Given these expenses, some of our
creditors would become reluctant to “roll” our debt into the future by offering new
loans. This could cause a serious problem for the U.S. Treasury. This is how the dollar

Gambling on Short-Term Financing
Portugal’s government recently suffered a debt default. The country required a bailout
by the European Central Bank (ECB) because it had too much short-term debt coming
due and not enough lenders were willing to extend these loans at affordable rates.
Lots of economists criticized Portugal’s borrowing strategy because much of its debts
were short-term.
Apparently, these folks haven’t bothered looking at the U.S. Treasury’s debt maturity
curve. We have. The numbers are so shocking, we expect most of our subscribers
simply won’t believe us. You can read all of the numbers for yourself, if you’d like.
Bureau of the Public Debt includes all the numbers in its Financial Audit (which you
can read on its website.
Feel free to read all 35 pages… Or focus on just this piece of data. It’s all you really
need to know: 61% of all the marketable Treasury debt held by the public will mature
within four years. Thus, over the next four years, the U.S. Treasury must either repay
or refinance more than $1 trillion in existing debt each year – not to mention
additional deficit spending of at least $1.5 trillion. For us to avoid a default , the
U.S. Treasury may have to borrow or refinance as much as $10 t rillion in the
next four years.
That would double the amount of U.S. Treasury bonds currently trading in the world’s
Think about that for a minute. Then, consider the decades-low yields in the Treasury
market today, which would surely rise to accommodate this enormous increase in

Now, try to arrive at any sort of scenario that ends well for today’s U.S. Treasury
bond market investors. We can’t… We don’t know exactly what the end game will
look like or exactly when the bond market will crash. But we know it is coming. We
know it can’t be avoided. And we know many investors will suffer catastrophic losses.
Given these risks, the Federal Reserve cannot allow the Treasury’s borrowing costs to

It cannot allow the dollar to strengthen.
It cannot allow the stock market to
fall, or business activity to slow…
That ‘s why we are 100% certain the Fed’s promise to stop printing money
and buying Treasury bonds on June 30 is a lie.

Warren James said...

Hey GM, that ratio is a really good find - seems to indicate the silver:frn as a lagging indicator against the 10Y ratio. Maybe this is an artefact of the derivatives fabric and monetary policy.

This is worth exploring a bit further - as you say there shouldn't in theory be anything special about silver, but if its fate is permanently entwined with treasuries that is useful for making some long term predictions. More power to you.

My long term view is that US Treasuries will always stay in play - especially in a freegold scenario. That bodes well for silver long term.

GM Jenkins said...

Louis - I think the PIMCO dumping bonds news you're referring to was just a few months ago, right? My point was that the silver:10 yr ratio started a straight line path up in April 2010. When it crossed the center trend line, that was mid-August 2010, and that's precisely when silver finally broke 20 decisively and started its unimpeded move to 50.

Louis Cypher said...

Yeah it was a couple of months ago everyone realized he was out of bonds but he dumped them earlier. I haven't dug to see when he actually started unwinding. As the Pimpco boys love to say "Look at what I am doing not what I am saying". He was talking up bonds until he had none left.

GM Jenkins said...

Louis - that's a great article you pasted, wow. (Though I hate when a financial analyst says he is "100% certain" about anything.) And I now understand your point about PIMCO ... that might indeed be it.

Warren - I agree it's worth exploring further.

As I mention above, I was actually interested in *how much silver a dollar buys* divided by the 10 yr yield-- not *how many dollars silver buys* divided by the 10 yr yield -- as the latter has no intuitive meaning for me. But since I couldn't do that on, I looked at the chart above and I was surprised at what i saw.

For one thing, as you point out, there seems to be a lagging indicator thing going on at times.

Then, if you try to draw trend lines for the dollar price of silver over the past decade (as I have done here in my amateur fashion), you notice that the 2008 crash appeared to FUBAR the nice trend that had been developing for the 5+ previous years. But, that's not th ecase with the ratio chart here. Though it tracks silver price closely, nonetheless, it appears far more robust to the 2008 shock. The ratio spent a few short months outside the 2 lower trend lines over 7+ years until 2008, when it popped above it for a few months at the beginning of the year, and fell below it for a few short months at the end of the year, then went right back into that trend, which remained until August 2010.

I think the ratio might test support at the center trend line again. But if I am right that a new phase began in August 2010, then it should go right back up after and test resistance at the upper trend line again. I'm not expecting a big silver move until the fall.