28 July 2010

Follow up to FOFOA

FOFOA has hit me with a lot of questions in this comment. It is 11pm in Perth, so this will be brief, but they are interesting questions and I will cover off on them over the next few days.

When it comes to COMEX FOFOA, I also am a "conceptual thinker and a fundamental analyst-blogger". This is because my gold market experience has only been with the Perth Mint and the Perth Mint has never traded on COMEX, and nor can I see any reason why we would in the future. It is a position you can take I suppose when you refine 300 tonnes of physical per year. I mention it so it is clear where my expertise lies and where it does not. This won't stop me from theorising however, because that wouldn't be any fun.

You question the reality of COMEX. Certainly the fact that one does not have to put down full cash and only margin means that there may well be many technical traders playing with computer digits, and they may be in the majority. However there are also real physical players like miners and manufacturers.

However, I am reasonably confident that paper and physical are bound together. To make that statement I rely on one thing - arbitrage, or greed. Greed as a motivator is something I feel pretty confident relying on. I just don't consider it believable that a bullion bank or hedge fund or other big trader would leave profit on the table.

We cannot discount manipulations or games being played with cash or future prices. But to manipulate one of those means that the gap (ie the basis) between the market you are manipulating and the one you aren't widens or shrinks. If the manipulation goes too far then that will present an arbitrage opportunity to other players, which if we rely on greed as a motivator, they will take. That action closes the gap.

Now as one can "trade" the basis (for another day) as distinct from the price, it must therefore be possible that the basis itself can be manipulated. However trading the basis involves two "legs" - eg buy spot, sell futures or sell spot, buy futures - which again widens or shrinks the gap/basis, presenting arbitrage opportunities to others.

The game of trading to my mind is a "base" of real price setting physical deals with that price pushed and pulled by competing manipulators, speculators and arbitragers, of both paper and physical price. Price may go up, it may go down. Both cash and futures prices may go up, but the gap widen. Or both prices go up and the gap shrinks.

I see it like an elastic/rubber band being stretched and then bouncing back. That stretching is the "noise" I mentioned in my last post. It is fun to watch and I'm sure such watching can give you an insight into the games being played, but what matters is when it is stretched to far, and breaks.


  1. Getting to be an interesting series of posts on this topic. Looking forward to see where this ends up. So far we now have three of my favourite writers / thinkers involved...

  2. Hello Bron,

    Thank you for the response. I believe you have a unique perspective and that this is a valuable discussion, especially with your input. I posted my reply here.