FRED’s as good as gold, and the FRED Blog has used London Bullion Market Association data to prove it. In fact, our previous post tracks gold prices and appraises the new gold bar at the St. Louis Fed. Now these gold prices are quoted in three different currencies—U.S. dollars, British pounds, and euros—which is a golden opportunity to discuss arbitrage.
Arbitrage is the risk-free purchase and sale of an asset to profit from a difference in price across markets. Because the gold fixing price is quoted in three different currencies at once, it’s possible that one could make a profit by buying and selling gold in different currencies and then selling the currencies. For example: buy gold in U.S. dollars, sell the gold right away in British pounds, and then convert the pounds back to dollars in the foreign exchange market.
FRED can help us visualize this shiny concept: In the graph above, we show the ratio of the gold fixing price in U.S. dollars to the gold fixing price in British pounds. Then we graph the exchange rate between the U.S. dollar and the British pound. The two lines seem identical, so there’s no obvious arbitrage opportunity here.
But let’s dig deeper by building another FRED graph to show the difference between the U.S. dollar/British pound gold fixing price ratio and the exchange rate between the two currencies. If there really is no arbitrage opportunity, the graph should show a flat horizontal line at the zero mark.
This doesn’t look like a flat line, so did we find treasure?! Sadly, no. The graph shows differences in gold fixing prices between currencies, but they are extremely small and volatile. So small they’d likely be wiped out by transaction costs, such as brokerage fees in the precious metals and/or foreign currency markets. Rather than a gold mine, we seem to have found just some gold dust.
How these graphs were created: NOTE: Data series used in these graphs have been removed from the FRED database, so the instructions for creating the graphs are no longer valid. The graphs were also changed to static images.
Suggested by Diego Mendez-Carbajo.
No. This isn’t the plot of a National Treasure sequel. It’s the latest addition to the St. Louis Fed’s Economy Museum: a 9.75” long, 1.5” tall bar of gold on loan from the Mint. Because the bar is 99.999% pure gold, it weighs 28 pounds! So, how much does a 28-pound gold bar cost?
Let’s use FRED data to figure out the price of this bar, which is on display, coincidentally, right across from the museum’s FRED exhibit.
Although some people see gold as a hedge against inflation, the graph above shows just how volatile the price of gold can be. Here, we have the “fixing price” of a troy ounce of gold in U.S. dollars in the London bullion market. London is the largest trading center for precious metals, and gold prices are reported daily at two different times (10:30 AM and 3:00 PM London time) to account for these intra-day variations.
Sorry, but now we have to do some math. There are 14.5833 troy ounces in a pound, and the museum’s gold bar weighs 28 pounds. That’s 408.3324 troy ounces. Much like gold, FRED is very malleable; so we can customize the data to reveal the price of the entire bar. In the graph below, we’ve applied the formula a * 408.3324. Clearly, changes in global supply and demand affect the price. And, between January 1 and February 10, 2020, the price of the bar has ranged from $623,564.41 to $646,880.19.
If you visit the Economy Museum, you’ll have the chance to try to lift this bar yourself. Before you visit, though, you may want to eat your spinach: 28 pounds is no small weight. Speaking of, the bar is literally worth its weight in gold, but what about its weight in cash? At its highest, the price of the gold bar would be a little more than 14 pounds of (mostly) $100 bills. If, you’re interested, the formula $646,880.19 / $100 * 1 gram/bill * 0.00220462 pound/gram gets you there.
By the way, FRED fans: The Economy Museum also sells FRED t-shirts! Unfortunately, we have no price or weight data for those…
How these graphs were created: NOTE: Data series used in these graphs have been removed from the FRED database, so the instructions for creating the graphs are no longer valid. The graphs were also changed to static images.
Despite appearances, the graph above has two lines. If you look really closely, you can see a second color peeking out here and there. And what two series are these that track each other so closely? One is the daily price of gold in London as of 10:30 a.m. The other is also the daily price of gold in London but as of 3 p.m. You’d expect these prices to be very close to each other, but let’s graph the percentage change between the price at 10:30 a.m. and 3 p.m. to see exactly how similar they are.
In fact, what we have here is a fairly volatile series.* Many of these price changes, which occur within 4.5 hours of each other, are in the range of 1% to 2%. Some even more. This rate of change is about the same as the rate of inflation in the U.S. Such changes in commodity prices aren’t uncommon, of course, even if trading occurs around the clock on world markets. The London market is open 8 a.m. to 5 p.m. (London time). These series are just snapshots during part of that time, but market activity continues in a similar fashion at other times and elsewhere.
How these graphs were created: NOTE: Data series used in these graphs have been removed from the FRED database, so the instructions for creating the graphs are no longer valid. The graphs were also changed to static images.
* NOTE: Because there are many daily observations for the period shown, the graph offers only a sample of them. To see the details, just shorten the sample time.
