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To: pater tenebrarum who wrote (2877)	7/10/2000 1:09:15 PM
From: Archie Meeties	Read Replies (2) \| Respond to of 436258

skybluemonthly.freeservers.com ...borrow gold at a low interest rate (lease rate) from central banks, then sell gold at the market, after that, use the acquired USD to buy T-Bond. As the Gold Carry Trade and the forward selling of gold continue, gold price is becoming weaker and weaker. This makes Gold Carry Trade even more profitable. (This Gold Carry Trade is dynamic: Forward selling of gold in the market --> Gold price declines --> Gold Carry Trade becomes more profitable --> More traders decide to do the Gold Carry Trade --> More forward selling of gold in the market --> Gold price declines even further --> Gold Carry Trade becomes even more profitable --> Even more traders decide to do the Gold Carry Trade --> …) Since this factor is dynamic, there will be no equilibrium. In fact, as time passes, Gold Carry Trade is strengthening and as a result, we are moving further away from the equilibrium and gold price simply collapses. As long as the interest rate for gold leasing is lower than the yield of T-Bond, this "looks" like "free money". But there is one big potential risk. The cost of Gold Carry Trade is expressed in the price of gold, while the profit of Gold Carry Trade is calculated in US Dollar. If the price of gold goes up against USD, the profit will sink and the cost will skyrocket. In other words, if the price of gold rises against USD, this Gold Carry Trade has to be unwound. And those who have been doing Gold Carry Trade will be in deep financial trouble. Gold Carry Trade will not last forever, simply because central banks don't have unlimited amount of gold to lease. The beginning and the end of a Carry Trade are not symmetrical because, at the formation of a Carry Trade, the volume is at a minimum; at the time when a Carry Trade is unwound, the volume is at a maximum.