Precious metals can be traded through various multiple security classes, such as exchange traded funds, funds, options, futures and metal trading. The metals are usually classified as commodities. The most popular and most heavily traded commodities for investments globally, namely silver and gold, provide a lot of trading opportunities with high liquidity. This means that arbitrage opportunities exist in the trading of precious metals, just as with other tradable assets.
Below, we discuss the basics of the arbitrage trading of precious metals as well as factors that affect precious metals arbitrage.
What is arbitrage?
This refers to the simultaneous selling and buying of a security so as to take advantage of the differing buy and sell price and make a profit. There exist many types of arbitrage. These include:
- Time arbitrage, which is usually based on patterns or technical indicators and refers to when traders take time-based positions in precious metals securities and sell them after a specified period of time.
- Cash and carry arbitrage, which involves the creation of a portfolio of short positions in the underlying futures for an acceptable duration and equivalent long positions in physical assets. It should be noted that financing is required to purchase a physical asset.
- Market location arbitrage, which is the difference in the supply and demand of a precious metal in a particular geographical market compared to that in another market, which may bring about a difference in price that traders can capitalize upon.
What are some of the factors that influence arbitrage of precious metals?
Those factors include the following:
- Market influence
Given that commodities markets operate round the clock, arbitrage flow and trading flows from one geographical market to another with participants active across various markets. The trading activities of these participants across these different markets create significant opportunities for arbitrage.
- Time-bound speculations
Most traders usually trade precious metals based on technical indicators that may involve determining technical trends and taking short or long positions, waiting for a particular period of time and liquidating their positions based on profit targets or timing.
- Demand and supply
Governments and central banks around the globe tie their cash reserves to gold. Despite the gold standard not currently being used by most countries, inflation or macro-economic changes may cause a surge in the demand for gold, which is considered to be a safer investment in comparison to currencies or individual stocks. Traders usually follow such developments and try to make profits based on them.
At the moment, producers such as Asia Broadband Inc. (OTC: AABB) and others are ensuring that the existing demand for gold is met, thereby preventing the metal from experiencing abnormal volatility.
NOTE TO INVESTORS: The latest news and updates relating to Asia Broadband Inc. (OTC: AABB) are available in the company’s newsroom at https://ibn.fm/AABB
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