Typography

While I may have taken some jabs at the gold bugs in two recent posts, please don't take that to mean that I have it in for the metal itself. Gold is a fascinating topic with a history that is well worth studying. (See this , for instance). In that vein, what follows is some actual gold analysis. Something weird is happening in gold markets. The future price of gold (its forward price) has fallen below the current gold price. Now in fairness, this isn't an entirely new phenomenon. Over the last year or two, the price of gold one-month in the future has traded below the current, or spot price, a number of times. However, this observation has grown more marked as both the three-month and six-month rates have also recently fallen below the spot price. This degree of inversion is rare. Except for a brief flip in 1999 when near-term forward prices fell below zero for a day or two, future gold has almost always traded for more than current gold. See chart below, which illustrates t...

Nick Rowe recently asked what the point of repoing an object was when you could just sell it, repurchasing it later. He could see three reasons. Firstly, you might repo a particluar thing because you hold it dear and want it back. It might not be available were you to simply try buying it back. Secondly, you might repo an asset because future liquidity might be an issue. Thirdly, you might repo an asset rather than sell it because future prices are uncertain. My comment used gold markets as an analogy: Nick, I think for financial assets you are right about points 2 and 3. In gold markets, for instance, you'd rather lend or swap (ie. repo) your gold than sell it (upon the anticipation of buying it back at some future point) because you might fear that, come time to buy the gold back, the future price could be much higher, or that the gold market could be illiquid and you might not be able to buy. Incidentally, you can also sell your gold and buy a futures contract. Selling spot and...

The Austrian vs Keynesian end of the blogosphere often battle over the existence of a natural rate of interest. The Keynesian side typically points to Piero Sraffa's argument that there are many natural rates of interest, or own-rates, and therefore an Austrian sort of monolithic natural rate of interest simply doesn't exist. Over the last few weeks I've participated in the comments here at Jonathan Finegold Catalan's blog and here at Daniel Kuehn's blog. Here is an older comment in this vein on "Lord Keynes" blog. Bob Murphy also has a paper ( pdf ) on this subject and has commented on the above blogs on this subject. Sraffa's point that there are different own-rates was not a new one. Irving Fisher pointed this out many years before, in Appreciation and Interest (1896): If we seek to eliminate the money element by expressing the rate of interest in terms of real " capital," we are immediately confronted with the fact that no two forms o...

James Hamilton at Econbrowser had an interesting series of posts ( here and here ) on determining the effect of naive commodity index funds in crude oil and other commodity markets. His hypothesis was that: the more futures contracts the funds want to hold, the more risk the counterparties who short the contract are exposed to. According to the model, the futures price must be bid high enough to compensate the short side for absorbing the risk. This compensation comes in the form of an expected profit to the short side of the futures contract.  I pointed out in the comments that this sounded very familiar to me: ...isn't this an attempt to prove a version of Keynes's theory of normal backwardation? Here is Keynes: "If supply and demand are balanced, the spot price must exceed the forward price by the amount which the producer is ready to sacrifice in order to hedge himself, ie. to avoid the risk of price fluctuations during his productions period." Keynes wrote that ...