We can’t trust our government anymore. But you are the government now. Yes, that’s what I’m saying.
I think a lot about what I sometimes call “abstract commodity space.” Sometimes you want to buy nickel or aluminum or coffee or cocoa to make batteries or beer cans or cappuccino or chocolate bars, so you go to some supplier and negotiate a contract for the delivery of a useful amount of a particular grade of the commodity to your factory. Sometimes, though, you want to bet on the price of nickel or aluminum or coffee or cocoa, to hedge some risk to your business or just as a speculative bet. So you buy commodity futures, financial assets that reflect the price of a commodity but don’t require you to store it or worry about it spoiling.
The way these futures often work is that there are big warehouses full of the commodity, and people write futures contracts that essentially transfer the entitlements to the commodities in the warehouse, without ever having to take them out. Your futures represent a claim on some nickel or coffee in a warehouse in abstract commodity space,[1] and you don’t have to think much about the physical properties of the actual thing. The warehouse system has put a layer of abstraction on the messy commodity business, and you can treat the commodity as just a number on your computer screen.
We mostly talk about this when it breaks down, though. Sometimes the physical world tears through the layer of abstraction. The coffee or cocoa beans are stale, or someone discovers that the nickel in the warehouse is actually a bag of rocks.
Or: Abstract commodity space is fairly global, and you can trade abstract commodities from a computer screen anywhere in the world. But the physical world is not so seamlessly globalized. Now, gold in a warehouse in New York is worth more than gold in a warehouse in London. Here’s a Wall Street Journal article on “Why Dealers Are Flying Gold Bars by Plane From London to New York”:
Gold is, for the moment, worth substantially more in Manhattan than in the U.K. capital, sparking the biggest trans-Atlantic movement of physical bars in years. Traders at major banks are racing to yank gold from vaults deep below London’s medieval streets and from Swiss gold refineries and ferry them across the ocean. …
Banks run big offsetting positions, owning gold bars in London, lending them out to earn a return and hedging the risk that prices fall by selling futures in New York. JPMorgan and HSBC, which clear gold transactions and store bullion for other banks in London, are the biggest players in this trans-Atlantic market.
Banks run big offsetting positions, owning gold bars in London, lending them out to earn a return and hedging the risk that prices fall by selling futures in New York. JPMorgan and HSBC, which clear gold transactions and store bullion for other banks in London, are the biggest players in this trans-Atlantic market.
The trade appears almost risk-free as long as prices on both sides of the Atlantic are close to each other. But when prices on the Comex surged above those in London late last year, baking in possible tariffs, contracts that the banks had sold in New York were suddenly underwater. …
Banks could close the trade by buying futures in New York, but such a move would mean crystallizing those losses. Another alternative: flying the physical gold they owned in London to New York and delivering it to the futures contracts’ owners instead. […]
Comex contracts require a different size of bar, so traders need to send gold to Swiss refiners to recast it before flying on to the U.S. Sometimes, they cut out the first European leg by handing the refiner gold in London in exchange for the right size of bar, or flying bullion in from Australia instead.
