Money for Nothing

It's now almost two months since we had the unusual situation that gold futures in the US were trading substantially above gold spot in London. As predicted, we now know that traders took advantage of this. They loaded up on physical gold in London which they flew to the US for delivery into the futures market. By simultaneously buying spot in London and selling futures in the US, the traders were effectively making money for nothing. All they had to do was to arrange for transportation.

Since traders were making guaranteed money on this arbitrage, others must have lost money without any kind of compensation or hope of future gains. Whatever the traders made in guaranteed profits were necessarily covered by others, which begs the question, who were prepared to take the loss?

One possibility is that foreign central banks deemed hostile or undemocratic in the West have been using the US futures market to circumvent restrictions in London. Instead of buying gold directly from London they've paid a premium for US futures to ensure delivery. Knowing full well that the US futures market cannot default on delivery without loosing credibility as a global gold trading hub, foreign central banks have forced the US-London gold cartel into shipping gold from London to the US for ultimate delivery into foreign hands.

If this is indeed what's going on, then we should soon see numbers coming out of the US futures market indicating that the gold flown out of London ended up as delivery to foreigners. With more than 500 tonnes of gold shipped to the US in a single month, this game cannot continue for long before something blows up.

By Jonathunder - Own work, CC BY-SA 3.0, Link