Yield Curve and Mineral Prices

The Yield Curve & The Minerals (02/05/08)

2008-05-03T12:00:00.013+03:00

I am posting here at the end of each week the type of the yield curve (steep,normal or inverted), at the close of the Market, the projection of my Model and the variation over the last day of the minerals price.

The Yield Curve is Steep

According to my research (Commodities and Interest Rates) minerals should be going down. Obviously my Model failed on Friday because of of a steep technical rebound.

My model is not meant to detect technical rebound, as such, it is more fit to track its record over the week rather than the day. Starting next week I will post the shape of the yield curve at the end of the week and the vaiation over the last week

The curve is slightly steep an d the trend is a lowering of the steepness. It is possible, an I am not saying it will, that the curve becomes inverted in the short run. I am not in the business of forecasting the yield curve.

The beginning of the week should bring a downturn of minerals.

All the Prices Are in USD

Energy (1/3 of the portfolio)

Crude Oil Future (NYMEX) bbl: 116.320 +3.800 +3.38%

Precious Metals (1/3 of the portfolio)

With High Industrial Value (1/6 of the portfolio):

Palladium Future (NYMEX) Troy oz: 420.00 +4.50 +1.08%
Platinum Future (NYMEX) Troy oz: 1,908.20 +25.90 +1.38%
Rhodium Spot Troy oz: 9,110.00 +25.00 +0.28%

With Low Industrial Value (1/6 of the portfolio):

Gold Future (COMEX) Troy oz: 858.200 +7.100 +0.83%
Silver Future (COMEX) Troy oz: 16.465 +0.260 -1.60%

Base Metals (1/3 of the portfolio)

Copper Future (LME) MT: 8511.500 +195.500 +2.35%
Zinc Future (LME) MT: 2,199.000 +30.500 +1.38%
Nickel Future (LME) MT: 28,275.000 +45.00 +0.16%
Aluminum Future (LME) MT: 2,884.500 +80.500 +2.87%
Lead Future (LME) MT: 2,574.500 +9.500 0.37%

The Yield Curve & The Minerals (25/04/08)

2008-04-27T15:12:00.013+03:00

The Yield Curve is Steep

According to my research (Commodities and Interest Rates) minerals should be going down. Obviously my Model failed on Friday because of the shock of the confrontation between a Iranian and a US boat.

The closure of the UK pipeline should not increase on the demand for crude oil: it should increase the demand for refined product but decrease the demand for crude.

The beginning of the week should bring us a large downturn of minerals.

Energy (1/3 of the portfolio)

Crude Oil (NYMEX) bbl: 118.520 +2.460 +2.12%

Precious Metals (1/3 of the portfolio)

With High Industrial Value (1/6 of the portfolio):

Palladium (NYMEX) Troy oz: 448.95 +2.50 +0.56%
Platinum (NYMEX) Troy oz: 1,960.00 -2.70 -0.14%
Rhodium: 9,080.00 +0.00 +0.00%

With Low Industrial Value (1/6 of the portfolio):

Gold (COMEX) Troy oz: 887.200 +0.400 +0.05%
Silver (COMEX) Troy oz: 16.846 +0.190 -1.14%

Base Metals (1/3 of the portfolio)

Copper Future (LME) MT: 8666.500 +53.500 +0.62%
Zinc Future (LME) MT: 2,299.500 +80.500 +3.63%
Nickel Future (LME) MT: 29,395.000 +615.00 +2.14%
Aluminum Future (LME) MT: 2,962.500 -7.000 -0.24%
Lead Future (LME) MT: 2,754.500 +9.500 0.35%

The Yield Curve of Keynes' Liquidity Trap

2008-04-22T14:51:00.017+03:00

The liquidity trap is usually defined as a zero lower limit of short-term interest rates.

However you can define a yield curve of the Liquidity Trap where you have a positive lower limit of long-term interest rates.

If the Market does not reward the investor for interest rate risk at a given maturity he then prefers liquid assets over long-term assets of that maturity: it is what Keynes' termed the liquidity preference.

When a yield curve is steep the Market prefers long-term assets over short-term assets, when the yield curve is inverted the Market prefers short-term assets over long-term assets.

The normal curve marks Market indifference between short-term and long-term assets.

The Yield Curve of Keynes' Liquidity Trap is simply the normal yield curve coming out of 0% for very short term-assets.

The traditional zero lower limit is simply the short part of the Keynes' Liquidity Trap Yield Curve.

My model says that, when long-term rates get to their positive lower limit, banks stop transforming short-term rates into long-term investments of that maturity.

The phenomenon soon propagates to the entire longer part of the curve.

Then central banks, in order to increase long-term investments, the conduit of money creation, is constrained to lower short-term rates to zero without being able to generate any long-term investments.

What makes Keynes' Liquidity Trap so terrible is that it stops the money creation.

Because of Greenspan Conundrum it is highly probable that long term rates will reach the longer part of the yield curve of Keynes' Liquidity Trap before short-term rates fall to zero.

My model of the yield curve never gave a signal of a systemic collapse during the recent credit crisis: it has always predicted that the Federal Reserve had sufficient room to rescue the market and the economy.

The Yield Curve & The Minerals (18/04/08)

2008-04-20T10:00:00.006+03:00

I am posting here at the end of each week the type of the yield curve (steep,normal or inverted), at the close of the Market, and the variation over the last day of the minerals price.

The Yield Curve is Steep

According to my research (Commodities and Interest Rates) minerals should be going down.

Energy (1/3 of the portfolio)

Crude Oil: 116.690 +1.830 +1.59%

Precious Metals (1/3 of the portfolio)

With High Industrial Value (1/6 of the portfolio):

Palladium: 459.00 +0.00 +0.00%
Platinum: 2053.00 +1.00 +0.05%
Rhodium: 9035.00 +0.00 +0.00%

With Low Industrial Value (1/6 of the portfolio):

Gold: 915.200 -27.700 -2.94%
Silver: 17.820 -0.485 -2.65%

Base Metals (1/3 of the portfolio)

Copper: 8635.250 -42.000 -0.48%
Zinc: 2.259.500 -31.750 -1.39%
Nickel: 28668.00 -452.00 -1.55%
Aluminum: 3044.250 +15.750 +0.52%
Lead: 2827.000 +25.500 0.91%

Minerals & Interest Rates

2008-04-18T16:08:00.013+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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