I wrote on May 1st, 2008 an article whose title was Commodity Conundrum Solved: The Hidden Parameter in Interest Rates.
I would like to point out here a special case which I have overseen. It is the case of deflation. The spread between long term yields and short-term yields is replaced by the spread between long-term yields and inflation. That means that given the current volatility of interest rates an expected deflation of more than 0.64% and the present Yields on US Treasury Bonds of 3.96% (against a normal spread of 4.60%) would bring back the price of minerals to their marginal cost of extraction which is now much below $300 (with a predictable short term overshoot given the high volume of gold stored outside the ground for speculative purpose whose price is not limited downward by the marginal cost of extraction).
In a depression that marginal cost of extraction given the lower price for machinery, work, and transport could go much further.
The drop in mineral prices and in particular for gold could be very steep in the days to come.
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