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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. Fourth-quarter US GDP came in at 2.3 per cent, weaker than expected, bringing the 2024 year-end GDP growth rate to 2.8 per cent. Consumption was particularly strong, and while investment was soft, though that may have been to temporary factors. All of that seems to validate the Fed’s decision to pause interest rate cuts. Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.
Gold is not a currency (a historical anecdote)
Gold hit an all-time high yesterday. Regular readers of Unhedged will know that we have mixed feelings about the metal. We don’t like investments that don’t generate cash flows, and gold is a terrible inflation hedge to boot. On the other hand, there is no arguing with performance, and lately gold’s performance has been awesome.
Congratulations, then, to readers who have leapt on the gold train. Keep in mind, however, that while gold performs best at moments of chaos, it is not a contract, like other financial products. It’s a thing.
An example. A few days ago our colleague Leslie Hook had a nice piece about the rise in gold stockpiles in New York and shortages in London:
A surge in gold shipments to the US has led to a shortage of bullion in London, as traders amass an $82bn stockpile in New York over fears of Trump administration tariffs.
The wait to withdraw bullion stored in the Bank of England’s vaults has risen from a few days to between four and eight weeks . . .
The shipments are also the result of higher prices on the futures exchange in New York than in the cash market in London. The unusual arbitrage opportunity has incentivised traders to send the metal across the Atlantic.
The story came with this striking chart:
What struck me was not the big recent rise in Comex inventories, but the absolutely bonkers jump coinciding with the outbreak of Covid-19 in 2020. It makes sense that people who had to move gold to the US would rush to do so ahead of tariff imposition. But why should people want more gold in New York during a global pandemic?
I put this question to John Reade, market strategist at the World Gold Council, who emailed me the following (to me) astonishing answer.
Financial investors who want exposure to gold often take long futures positions on the Comex exchange; the other side of that trade is usually an intermediary, typically a bank. These futures contracts are not usually settled with the exchange of physical gold. They are either sold or rolled over. If they are settled physically, however, this has to happen in a Comex registered vault in New York. But the banks on the short side of the trade on Comex often hold their offsetting long position in gold in London, where it is (for some reason) cheaper to do so than in New York.
Here’s the weird bit: physical settlement in Comex and in London require different sizes of gold bars. In London, it’s 400oz gold bars. Comex takes delivery either in 100oz bars, or bundles of three 1kg bars. Conversion of London gold bars for New York delivery can be done in short order at (wait for it) refineries in Switzerland. The gold is then flown to New York (Planes! To settle a financial transaction! In the 21st century!).
But in 2020, Covid hit Italy just over the border from the refineries, which closed or reduced capacity, and planes stopped flying from London to Switzerland and from Switzerland to New York. There was panic, and Comex shorts in New York rushed to buy gold to cover their positions, driving the New York gold price to a huge premium over London. This attracted arbitrageurs, who got their hands on Comex-sized bars and chartered planes (planes!) . They sold Comex futures at that big premium, and used the proceeds to buy London gold and fly it to New York, driving London inventories way up, as the chart above shows.
I asked Reade whether all this gold-melting and plane-flying didn’t seem a little old fashioned. His reply:
In theory, changes could be made to the two gold markets that would make dislocations such as we have seen recently and 2020 less of a problem . . . A common delivery standard could be adopted, [or changes could be made] allowing delivery to be made in other locations . . . But I think the gold market quite likes the situation the way it is. It allows arbitrage between the two exchanges and, because of the differences in the contract specifications, friction allows opportunities. Of course when these small frictions dramatically escalate, some players get hurt, but overall I think the big players in the gold market like things the way that it is because of these opportunities.
It is easy to think of gold as a financial asset, a sort of super-currency. But it’s stuff. At times of stress, it reverts to acting like it.
Aiden’s picks
On Monday, Rob offered very sensible, conservative picks for this year’s FT stockpicking competition (JPMorgan, Vulcan, McKesson, Google and maybe UPS, after it got crushed yesterday). Lame. Recent winners have gone for high beta or heterodox calls. With no real money on the line, I will be following their example. My picks:
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Long MicroStrategy: Trump says he will take crypto to the moon. MicroStrategy is essentially a leverage bitcoin play, with a business underneath. The stock has been down this week over a potential tax issue. I think that is overblown, making this a good time to buy.
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Long Blue Owl Capital: Despite the IMF’s hand-wringing about private capital, 2025 will not be the year that the industry implodes. Instead, risky lenders such as Blue Owl will get boosts from a lax regulatory environment and an M&A frenzy.
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Long Budimex: If a peace deal is struck in Ukraine in 2025 or 2026, Poland’s biggest construction company, Budimex, is well positioned to capitalise on Ukraine’s rebuilding.
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Short Glencore: Glencore is more a commodity trader than a miner. It will face headwinds if tariffs go up around the world, Chinese growth falters, and green tech declines in the US.
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Short Google: This one might come back to bite me, but hear me out. Of the Magnificent 7, Google is probably the biggest loser from the DeepSeek news: its proprietary chips seem like a waste of money, and cheaper AI applications will hurt its search business. Plus, its recent antitrust issues mean it may have to sell or spin off Chrome or Android, or alter its ad sales model. This will hurt its underlying business. As a kicker, Rob is long Google and it will be fun to crush him.
Readers: join the contest and beat us both.
(Reiter)
One good read
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