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, stockcharts.com 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) .