Interest Rates and the Mineral Bubble: The Hidden Parameter

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.

Comments

[Dan Caldwell]

Culturally, gold is an inflation hedge utilized by peoples in developing countries. As more and more people OUTSIDE of the US upgrade their lifestyles and move up into the lower middle class it is not uncommon for them to keep 10% of their wealth in physical gold. Worldwide demand is rising incrementally even as mining production slows. Also, one oz. of gold has historically been worth 15 bbls. of oil, which would place the equilibrium price of gold at $1,650/oz.

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.

[gigem77]

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.

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.

[bob jacbson]

The people working at the oil companies are drilling under water a mile deep and then drilling 5 miles down into rock formations to produce oil and gas. These wells cost about 200 million $ dollars each. No cheap oil is available to our oil company personnel

[Whisper OnThe Wind]

If a rumor was whispered that the dollar was gaining, would the dollar, in fact, gain? 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. Are the profits being taken by the oil companies really that far out of whack with the profits taken by finance companies? Or the pay of baseball/football/bask... players? It's all garbage. And you aren't convincing me.

[Seadrive]

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. This poster is totally WRONG, and if his money is where his mouth is, he will have a lot less of it in short time. Miners hoarding their reserves in the ground? Name one. I can't find a single case of that. Shalom Hamou, good luck. You are really going to need it!

[paultaut]

Historical Norms.......everyone keeps quoting Historical Norms....THERE are no historical norms for the present environment. We are in the process of creating a New norm...the days of cheap anything are gone...

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

[Shalom Hamou]

More than anything else it is the shape of the yield curve rather than the level of interest rates or anything else that shapes the evolution of minerals.

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...

[paultaut]

I just can't wait....what does the yield curve in the US have to do with the price of gold in a Global economy?

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.

[Shalom Hamou]

We probably have a different definition of a normal yield curve.

[Shalom Hamou]

To Bob Jackson:

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...

[Shalom Hamou]

To Dan Caldwell:

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.

[Shalom Hamou]

To Gigem77:

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...

[Shalom Hamou]

To Whisper On The Wind

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...

[Shalom Hamou]

To Seadrive:

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...

[Shalom Hamou]

To paultaut:

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...

[RobespierreXIV]

Gentlemen: Gold bugs and inflation have one thing in common. They are eternal. Money is a mental mutual agreement. Tulip bulbs once had value. For 2500 years gold has been used as a medium of exchange. It seems reasonable that it is not going to vanish. As a British economist recently said,"In 1920 an ounce of gold would buy a decent men's suit. In 2008 an ounce will buy you one also." X number of barrels of oil, bushels of wheat, tons of steel, or what you will can be exchanged for suits or any paper money in the world. Amen. Robespierre XVI