A Commodities Fund Manager's Comments On Aureate Vs Gold-Miners Arbitrage

John Netto, a main inwards a commodities fund that focuses heavily on gold, wrote me the next concerning my article on arbitrage betwixt aureate too gold-miners: "... at that topographic point is a paradox that exists inwards many instances amongst aureate companies too the underlying metal, which could potentially unwind most pairs traders. This is the dynamic of non-recourse loans that companies accept on when doing a project. This would never present upwards inwards a quantitative model simply tin set companies inwards a orbit that when aureate rises, they tin acquire wound to approximately degree. Banks that create non-recourse loans demand the companies to sell futures to guarantee payment for the projection inwards example the toll of aureate falls. This way, they volition non lose if the projection no longer becomes a feasible trouble concern endeavour. If aureate rises, these companies must present massive mark-to-market losses on their books based on novel accounting rules. So the theory that aureate companies tin merchandise correlated to the toll of the underlying is correct, even then a dynamic exists that has the potential on a per fellowship footing to materially touching on that."

I notice Mr. Netto's comments really insightful. I would brand i farther point: if the mark-to-market accounting losses are temporary too volition recover adjacent quarter, nosotros tin hold off their stock prices to revert. This is precisely the cointegration scenario that I talked virtually -- a toll reversion afterward approximately catamenia of time, simply non a day-to-day or week-to-week correlation.