7 ms·

I don't think what you are talking about is arbitrage, either. You are talking about using interest free loans from credit cards in order to make a leveraged b

by feral 15y ago

I don't think what you are talking about is arbitrage, either. You are talking about using interest free loans from credit cards in order to make a leveraged bet on the price of gold; that is not arbitrage. If gold decreases in price - and its close to record highs, however you want to intrepret that - you are taking a huge risk.

bluena 15y ago
agreed. buying gold is risky. instead puting it in a 2% account would be wiser.
- nirvana 15y ago
  I covered the idea of putting the money into a CD in my comment. Even if you get a CD that returns %6, you'd need $400k in debt to raise the $20k. Maybe mentioning gold is "politically incorrect" and so I'm getting down votes and disagreement, when the gist of my comment was talking about different ways you could arbitrage to raise money for a startup.
  - justincormack 15y ago
    No you are talking about different ways you could speculate to fund a startup. Thats not arbitrage.
    - nirvana 15y ago
      If you provided a counter argument, I could respect that. Instead you're lying about what I've said, and that's worse than useless.
- typicalrunt 15y ago
  However, once you factor in inflation -- which runs at or around 2% depending on the country you live in -- you are making no money at the end of the year.
  - 2arrs2ells 15y ago
    No, as a borrower, inflation works to your advantage. i.e. I borrow $1k at 0% for one year. I put the money in a 1 year CD paying 1% interest. At the end of the year, I pay back the loan with the CD's principal, and put the $10 interest in my pocket. Even if inflation were 2% (or 10%, or 100%), I am still making money - no matter how deflated the value of the dollar is, I still have more dollars in my pocket than when I started. (Inflation hurts lenders of money, not borrowers)
nirvana 15y ago
Maybe I should have been more clear. What you're arbitraging is two rates of return-- the interest rate of the loan, and the return of the investment. In more conventional arbitrage, you're buying a commodity at one price in one market and selling it at another price in another market at exactly the same time. Here you're doing that, only the commodity is money. (Gold is money.) You could substitute a foreign currency, or foreign bonds for gold in my example, just as easily. In that case, you'd be borrowing US dollars and buying, say, Greek Bonds. I picked that example because greek bonds have a high rate of return. They're also debt... you're getting debt in one market and selling it in another. Greek Bonds obviously have risk. All arbitrage has risks, and those risks can be huge. That the risk is huge doesn't make it any less arbitrage. FWIW, I don't think gold is at a particularly high price. I think the dollar and other currencies, which have been long over valued, are a little less overvalued than they were. I don't price gold in dollars, I price dollars in gold.
- klochner 15y ago
  so by your definition, any leveraged investment is arbitrage.
  - nirvana 15y ago
    I, in fact, did not say that, making this a non-sequitor.
    - Retric 15y ago
      The problem is you assumed it even if you did not say it. The are basically two ways to do arbitrage one is to execute the trades fast enough that the prices are fixed. Or do a closed transaction where the underling commodity price is irrelevant and you make money even if the price spikes or drops. AKA buy a directive of a stock and short that same stock. You can still be bitten if one of the counter-party does not finish the transaction but at least on paper your safe. PS: Get a loan at 0% interest, buy an option on gold at 1000$ and short gold at 1100$. Now most of the time things are priced in such a way that you will lose money on this trade however if people are selling the options to cheaply then you could execute this trade and be guaranteed to make money. Assuming the people that sell you the option don't default. Unfortunately, you can make money by selling options worth more than your capital so you come out ahead on average and if bad things happen you are ridiculously broke but effectively still at zero. Sort of like me making a billion dollar bet that the redskins don't go undefeated this year, it's easy for me to price those risks based on the idea I would only go broke in such a way it they seem really attractive even if they are next to worthless.
fuzzythinker 15y ago
Not to mention that he seemed to forget about the 3.5% or so transaction fee that is usually associated with the 0% loans. This makes most safe investments like CDs in today's rates a negative return.
- nirvana 15y ago
  I mentioned CDs in my article. Did you stop reading at the first mention of gold? Further, CDs are not a "safe investment" because the real rate of inflation (not CPI, but actual monetary inflation) is greater than the return of the CD, by quite a lot. Another risk of CDs is that the bank might fail. Since the FDIC hasn't been collecting reasonable premiums against this risk, and banks are failing left and right, the deficit is made up via inflation, which means, you get paid back in lower value dollars than you lost. This is also what makes gold a relevant possibility for this type of arbitrage. Since gold's supply is relatively fixed, as the dollar declines due to inflation, the gold price will appreciate. So, even if there were no increasing interest in gold from investors (e.g.: no appreciation due to increased demand) you'd be arbitraging the delta between the exchange rates of the two currencies. Borrowing in dollars and buying gold. This could be, as I mentioned, done between any two currencies. Or, in the case of CDs, which I mentioned in my original comment, within the same currency. But I guess that since I mentioned gold it is Very Important for you lot to say that gold is risky, and that I'm obviously falling to "mention" those things that I, uh, er, mentioned.
  - fuzzythinker 15y ago
    Hmm, not sure why you and others respond so negatively on my comment. I am merely pointing out that your original reply did not account for the usual 3-3.5% transaction fee on these 0% loans. Your only mention of such fee may be the "could borrow at %1 (on the "zero interest" plans)", which isn't anywhere close the 3-3.5% that I see. So taking that into account, "safe" investments like CDs will actually give negative return. Meta: Not only did I read your whole initial parent post, I had also not mentioned a single word about "gold". So I am really intrigued by your negative tone and accusation of me jumping on the "anti-gold argument" bandwangon. Btw, I really enjoy reading your HN posts. But that doesn't prevent me from pointing out flaws in your logic. If my original reply sounded like an attack, then I guess I should be more careful in my wordings.

by feral 15y ago

bluena 15y ago

agreed. buying gold is risky. instead puting it in a 2% account would be wiser.

nirvana 15y ago
I covered the idea of putting the money into a CD in my comment. Even if you get a CD that returns %6, you'd need $400k in debt to raise the $20k. Maybe mentioning gold is "politically incorrect" and so I'm getting down votes and disagreement, when the gist of my comment was talking about different ways you could arbitrage to raise money for a startup.
- justincormack 15y ago
  No you are talking about different ways you could speculate to fund a startup. Thats not arbitrage.
  - nirvana 15y ago
    If you provided a counter argument, I could respect that. Instead you're lying about what I've said, and that's worse than useless.
typicalrunt 15y ago
However, once you factor in inflation -- which runs at or around 2% depending on the country you live in -- you are making no money at the end of the year.
- 2arrs2ells 15y ago
  No, as a borrower, inflation works to your advantage. i.e. I borrow $1k at 0% for one year. I put the money in a 1 year CD paying 1% interest. At the end of the year, I pay back the loan with the CD's principal, and put the $10 interest in my pocket. Even if inflation were 2% (or 10%, or 100%), I am still making money - no matter how deflated the value of the dollar is, I still have more dollars in my pocket than when I started. (Inflation hurts lenders of money, not borrowers)

nirvana 15y ago

Maybe I should have been more clear. What you're arbitraging is two rates of return-- the interest rate of the loan, and the return of the investment. In more conventional arbitrage, you're buying a commodity at one price in one market and selling it at another price in another market at exactly the same time. Here you're doing that, only the commodity is money. (Gold is money.) You could substitute a foreign currency, or foreign bonds for gold in my example, just as easily. In that case, you'd be borrowing US dollars and buying, say, Greek Bonds. I picked that example because greek bonds have a high rate of return. They're also debt... you're getting debt in one market and selling it in another. Greek Bonds obviously have risk. All arbitrage has risks, and those risks can be huge. That the risk is huge doesn't make it any less arbitrage. FWIW, I don't think gold is at a particularly high price. I think the dollar and other currencies, which have been long over valued, are a little less overvalued than they were. I don't price gold in dollars, I price dollars in gold.

klochner 15y ago
so by your definition, any leveraged investment is arbitrage.
- nirvana 15y ago
  I, in fact, did not say that, making this a non-sequitor.
  - Retric 15y ago
    The problem is you assumed it even if you did not say it. The are basically two ways to do arbitrage one is to execute the trades fast enough that the prices are fixed. Or do a closed transaction where the underling commodity price is irrelevant and you make money even if the price spikes or drops. AKA buy a directive of a stock and short that same stock. You can still be bitten if one of the counter-party does not finish the transaction but at least on paper your safe. PS: Get a loan at 0% interest, buy an option on gold at 1000$ and short gold at 1100$. Now most of the time things are priced in such a way that you will lose money on this trade however if people are selling the options to cheaply then you could execute this trade and be guaranteed to make money. Assuming the people that sell you the option don't default. Unfortunately, you can make money by selling options worth more than your capital so you come out ahead on average and if bad things happen you are ridiculously broke but effectively still at zero. Sort of like me making a billion dollar bet that the redskins don't go undefeated this year, it's easy for me to price those risks based on the idea I would only go broke in such a way it they seem really attractive even if they are next to worthless.

fuzzythinker 15y ago

Not to mention that he seemed to forget about the 3.5% or so transaction fee that is usually associated with the 0% loans. This makes most safe investments like CDs in today's rates a negative return.

nirvana 15y ago
I mentioned CDs in my article. Did you stop reading at the first mention of gold? Further, CDs are not a "safe investment" because the real rate of inflation (not CPI, but actual monetary inflation) is greater than the return of the CD, by quite a lot. Another risk of CDs is that the bank might fail. Since the FDIC hasn't been collecting reasonable premiums against this risk, and banks are failing left and right, the deficit is made up via inflation, which means, you get paid back in lower value dollars than you lost. This is also what makes gold a relevant possibility for this type of arbitrage. Since gold's supply is relatively fixed, as the dollar declines due to inflation, the gold price will appreciate. So, even if there were no increasing interest in gold from investors (e.g.: no appreciation due to increased demand) you'd be arbitraging the delta between the exchange rates of the two currencies. Borrowing in dollars and buying gold. This could be, as I mentioned, done between any two currencies. Or, in the case of CDs, which I mentioned in my original comment, within the same currency. But I guess that since I mentioned gold it is Very Important for you lot to say that gold is risky, and that I'm obviously falling to "mention" those things that I, uh, er, mentioned.
- fuzzythinker 15y ago
  Hmm, not sure why you and others respond so negatively on my comment. I am merely pointing out that your original reply did not account for the usual 3-3.5% transaction fee on these 0% loans. Your only mention of such fee may be the "could borrow at %1 (on the "zero interest" plans)", which isn't anywhere close the 3-3.5% that I see. So taking that into account, "safe" investments like CDs will actually give negative return. Meta: Not only did I read your whole initial parent post, I had also not mentioned a single word about "gold". So I am really intrigued by your negative tone and accusation of me jumping on the "anti-gold argument" bandwangon. Btw, I really enjoy reading your HN posts. But that doesn't prevent me from pointing out flaws in your logic. If my original reply sounded like an attack, then I guess I should be more careful in my wordings.