I was interviewed by Erik Townsend for Financial Sense on The Role of Arbitrage in Precious Metals Markets. Probably stuff readers of this blog already know, but if you want to hear me ramble on, download the podcast.
I take your point about the arbitrage mechanism, however it strikes me as if you're treating the $ as risk free. In any of the 'arbitrage' examples you gave, you are dealing in $, at least for some period. Indeed, you have previously noted that London OTC is primarily unallocated gold.
The $, as the obligation of its bank of issue, is junk, how can you be arbitraging junk?
The arbitrage I was talking about was physical being held and delivered into a contract.
Selling futures and buying unallocated is not a real arbitrage as at expiry you have to close out your futures, which just pushes up the price at that point, unwinding your original arbitrage. It is just a sort of temporal arbitrage and a bit more risky as you could get screwed when trying to exit or roll your position.
"The arbitrage I was talking about was physical being held and delivered into a contract."
Wouldn't that be an arbitrage between allocated & unallocated? I can understand that since allocated at least, can be denominated in ounces of gold rather than $.
If arbitrage is defined as 'risk free', any exposure to $ can't be considered arbitrage.
Sorry, missed your point. Yes you would have cash margin tied up in COMEX but also exposure to failure of COMEX or indeed loss of the physical gold you're holding.
By risk free I meant no exposure to changes in the gold price. Arbitrage still has risks to the markets in which the two offsetting positions are held.
One of my favourite blogs. Great to see you there!!
ReplyDeleteInteresting interview Bron.
ReplyDeleteI take your point about the arbitrage mechanism, however it strikes me as if you're treating the $ as risk free. In any of the 'arbitrage' examples you gave, you are dealing in $, at least for some period. Indeed, you have previously noted that London OTC is primarily unallocated gold.
The $, as the obligation of its bank of issue, is junk, how can you be arbitraging junk?
The arbitrage I was talking about was physical being held and delivered into a contract.
ReplyDeleteSelling futures and buying unallocated is not a real arbitrage as at expiry you have to close out your futures, which just pushes up the price at that point, unwinding your original arbitrage. It is just a sort of temporal arbitrage and a bit more risky as you could get screwed when trying to exit or roll your position.
"The arbitrage I was talking about was physical being held and delivered into a contract."
ReplyDeleteWouldn't that be an arbitrage between allocated & unallocated? I can understand that since allocated at least, can be denominated in ounces of gold rather than $.
If arbitrage is defined as 'risk free', any exposure to $ can't be considered arbitrage.
Sorry, missed your point. Yes you would have cash margin tied up in COMEX but also exposure to failure of COMEX or indeed loss of the physical gold you're holding.
ReplyDeleteBy risk free I meant no exposure to changes in the gold price. Arbitrage still has risks to the markets in which the two offsetting positions are held.