Thursday, November 20, 2008

Arbitrage using gold leasing

I got the idea from The Straits Times on Sat, 25 Oct 2008, pg A22

The idea is like this
  1. You borrow gold from a bank at 2.5% interest ( used to be 0.25% before the credit crisis, and that is really low!)
  2. Sell the gold for USD ( Gold is priced in the world market in terms of USD)
  3. Take the USD and lend it out at the current 1 month USD short-term LIBOR interest rate 3.24% (as of 24 oct 08)
  4. At the end of 1 month, you pocket the the extra interest of 3.24%-2.5%=0.74%
  5. Change the USD back to gold
  6. Return the gold back to the bank
At step 5, you may be worried that the gold gets more expensive. Hence you can actually buy a futures contract for gold.Meaning you actually fixed the price that you are going to change the USD back to gold before hand. Howeve you might need to pay a premium for this, but if the premium is lower that 0.74% as in the example, you will still make a profit. Risk free!

Things to take note for this to work!
  • Interest rate of borrowing gold from bank
  • Market price of selling gold for USD cash
  • Short term USD cash loan's interest rate
  • Future price of USD cash for gold
This as we can see, requires lots of conditions to occur in our favour in order to get the risk free profit. Also, lots of time need to be spent to monitor all the daily changes hence they are usually done by big fund companies which uses computers to monitor all these changes.

However if you happen to get lucky and come accross all the conditions, why not give it a try? It's really a risk free profit due to market inefficiency...if you don't make the profit, someones else will =)

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