Interest Rates and the Mineral Bubble: The Hidden Parameter 16 comments
-
Font Size:
-
Print
- TweetThis
The price of minerals has grown unabated since the Federal Reserve has started increasing short term rates.
All of the minerals have grown together, which cannot be explained by the growth of the marginal price of extraction alone: no price increases have caused the price of any mineral to stop its growth as a result of an increased investment in exploration.
This correlated increase in the price of minerals must be caused by a global parameter: if you consider the minerals as short term assets, you come to the conclusion that miners, confronted with an inverted yield curve would, as a group, prefer to hoard their minerals rather than sell them and invest the proceeds in long term assets.
How else would we understand that the cost of oil was multiplied by 5 over such a short period with a low depletion of the proven reserves?
How else would we understand that all the minerals saw their cost rising at the same period with a next to perfect correlation?
How else would you explain the fact that the rise of minerals started shortly after the rise from 1% of short term interest rates by the Federal Reserve?
Should the yield curve on the U.S. dollar return to normal, as it did on Monday, the miners would stop hoarding their reserves in the ground and the prices should go down in the direction of their marginal cost of extraction.
That price must be much lower than the expectation of all market participants.
Because of hedge funds holding, we should see some overshooting, in particular with minerals with low industrial use: gold and silver.
The correlation between the shape of the yield curve and the price of commodities is only one of the many overlooked signals that are embedded in the yield curve.
Among others, it can give a precise timing of a possible systemic collapse.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 16 comments:
Silver is an industrial metal more than a precious metal, and from the silver industry's own annual report silver short interest is net short more than a whole year of production. Almost every oz. of silver that has ever been mined has been used, not hoarded, and mining production is dropping even as industrial demand applications are rising. IMO silver will be the next commodity to face a parabolic run when people short the market suddenly being asked to deliver on their contracts and they can't find physical supply.
Name a miner that is "hoarding reserves". Copper is nearing $4.00 per pound and every miner with a pick and shovel is digging as fast and as hard as they can. High prices are a strong motivation to over produce, not hoard.
Crude oil prices soared because demand grew to nearly equal production. Chinese consumption of oil is growing 7.5% per year. The lack of spare production capacity is the key to understanding higher prices.
Food, Energy, Minerals, Purified Water...all are subject to at least double the demand envisioned in ALL Historical Norm theories...and thats all they are now. Had Brazil, India, China, Russia and the entire East European bloc, Vietnam, Indonesia, the entire Mideast been in Industrialization Mode at the same time as the currently Developed Countries the Historical Norm might have validity. They weren't and it doesn't
The yield curve gets inverted and mineral goes up, it gets normal or steep the minerals go down with a vengeance: a difference of few basis point make the difference between bull and bear
Shalom Hamou
shalem.ashalem@gmail.c...
When the yield curve was not inverted the price of gold doubled......as the US dollar went down, gold went up even though the yield curve was positive...
The current rise in gold is an attempt by the newly empowered wealthy to get out of the dollar......there is no current currency to get into....they are going into hard assets....Gold is just one of these assets.....
The sovereign funds have more money to invest than all of the hedge funds in the world combined...they are investing in hard assets because their respective country's currency reserves are overweight dollars and each country would like to diversify directly but can't without debasing the dollar even further...
What is the Yield curve in say...India,China,Braz... middle East,The Eastern European Bloc,Vietnam, etc....or don't they have any say in the little USA Box you have constructed.
The fixed cost of extraction are not relevant to the pricing of oil what is relevant is the marginal cost of extraction which is the highest variable cost of all the oil well that are needed to satisfy demand.
It is true , however that there might be some cases where the owner have no command on his output. I am willing to discuss that point here with you.
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
Since digital photography has replaced traditional film photography the industrial usage of silver has dramatically gone down.
You say:
"Almost every oz. of silver that has ever been mined has been used, not hoarded, and mining production is dropping even as industrial demand applications are rising."
What I am saying is that minerals are hoarded in the ground, so that remark is consitant with my article.
Hoarding, anywhere else than in the ground is not economically viable because the storage cost are higher and are deducted from the short term interest rateinterest rate.
You say:
"The fed has been decreasing interest rates for some time. So your first premise is wrong. Bernanke has cut rates 3 full percentage points. Commodities have risen in price throughout the period of those cuts. But Greenspan raised rates 14 times between 2004 and 2006 and commodities rose in price during that time frame also. Go back and do your research again."
I am talking about the shape of the yield curve, more precisely its slope, if the cut of the short term rate causes a decrease of the long term rate that is consistant with an inverted yield curve minerals can go up even if short term interest rate go up.
This is true also when short term rate goes up.
That phenomenon is of such an importance that Alan Greenspan has mentioned it pubicly and called it a Conundrum.
You say:
"Name a miner that is "hoarding reserves". Copper is nearing $4.00 per pound and every miner with a pick and shovel is digging as fast and as hard as they can. High prices are a strong motivation to over produce, not hoard. "
I can't name one miner hoarding reserves, what I am talking is market behavior, if someone is hoarding reserve do you believe he will make that public?
The high market price of something doesn't say anything about your willingness to sell it, if your expectation is that it will increase 1% in price tomorow wouldn't you wait till tomorrow rather than sell it at the "high" price of today?
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
Yous say:
"The price of oil is going up, even though our reserves are also going up, as of today. So it can't be demand, and it proves that conservation may not change the price of oil."
This is precisely my point saying that the supply is more a function of the yield curve rather than the equilibrium of offer as defined by the marginal cost of extraction and demand.
Your observation is backing my article it is not a rebuke.
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
You say:
"Gold, silver, oil, and commodities in general do not follow the yield curve, although they may seem to due to the fact that the fed normally keeps, or tries to keep, yields in more or less lock step with inflation, and inflation forecasts. This time the fed lowered rates in the face of higher inflation, along with printing billions of dollars of bailout money. Watch what happens to the "inflation curve", which commodities do follow."
The fact that minerals are an hedge to inflation is not proven: minerals have gone up when the Fed increased short term interest rates to 2.5% at that time there was next to no inflation.
Inflation has started to increase only six month ago.
Shalom Hamou
Independent Yield Curve Special Adviser
shalem.ashalem@gmail.c...
You say:
"When the yield curve was not inverted the price of gold doubled......as the US dollar went down, gold went up even though the yield curve was positive... "
We are not using the same yield curve and/or we have not the same evaluation of what an normal slope of the yield curve is.
You say:
"The sovereign funds have more money to invest than all of the hedge funds in the world combined...they are investing in hard assets because their respective country's currency reserves are overweight dollars and each country would like to diversify directly but can't without debasing the dollar even further..."
Most of the sovereign funds are from countries which do have mineral ressources one of their way to invest in hard assets, as you call them is precisely to keep their ressources in the ground.
You say:
"What is the Yield curve in say...India,China,Braz... middle East,The Eastern European Bloc,Vietnam, etc....or don't they have any say in the little USA Box you have constructed."
Even though the dollar has gone down and a lot of other currencies are used in the global economy, still nearly all international transactions are made in Dollar and all the minerals are quoted in dollars.
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...