Minerals & Interest Rates

2008-05-01T16:57:00.003+03:00

The Commodities Conundrum Solved
The Hidden Parameter in Interest Rates
The Yield Curve as a First Order Parameter of Future Minerals' Price Movements

Executive summary:

The commodities we are concerned with, here, are those with potentially very low storage cost.

Minerals, when kept in the ground, have a storage cost next to zero.

Investors need of a reliable, efficient and timely index of the future evolution of the price of minerals.

They need a mean to evaluate the risk of a position in order to calibrate the size of their exposure.

I observed a strong link between the evolution of the market price of minerals and the slope of the yield curve.

The slope of the yield curve indicates the preference of the Market between short-term assets and long-term assets.

Attention:

My model says a yield curve is normal if the differential between long-term rate and short term rate pays exactly for the interest rate risk (Market indifference between long-term and short-term assets: neutral monetary policy).

It is steep if the differential between long-term rate and short term rate pays more than the interest rate risk (Market preference for long-term assets: accommodative monetary policy).

It is inverted if the differential doesn't pay for interest rate risk (Market preference for short-term assets: restrictive monetary policy).

As a result a yield curve may have a positive slope and still be inverted contrary to the general perception.

When the yield curve is inverted the Market prefers minerals in the ground (their most valuable short-term assets) over any long-term instruments.

When the yield curve is inverted, because of profit maximization, Miners and Drillers, as a group, prefer hoarding a higher proportion of their minerals in the ground (their preferred short-term assets) rather than extract them and invest the proceeds in long-term instruments.

Hence the marginal cost of extraction of minerals becomes irrelevant to their market price as miners stop maximizing their output under the constraint:

Market Price - Their Marginal Cost of Extraction > 0

Reminder: the Marginal Cost of Extraction does not include fixed cost (i.e. exploration cost, cost of an offshore platform...)

The quality of the index, the slope of the yield curve, is superior to any other known system:

It is Timely.
It is Accurate.
It is a Reliable Risk Management Tool.
The Model of the Yield Curve is Proprietary.

Track Record: I post on here, at the end of each week, the type of yield curve at the close (steep, normal or inverted) and the price movements of the components of my recommended portfolio over the last day of trading.

The Cost is Low: only 10% of the Profit Generated.

Targeted customers: hedge funds, sovereign funds, mining and oil companies.

Exclusivity is an option for managers of large managed positions in Minerals.

I stand ready to retrocede a significant share of my fees to the intermediary that would introduce me to a significant fund manager, if of course the link results in a business relationship.

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Yield Curve and Mineral Prices

Minerals & Interest Rates