90 second explanation of what happened here [Thread] https://twitter.com/markets/status/1260543564674666497

You live in London. It's your gf's birthday next month & you need to get her something. How about an ounce of gold? Cool. That will be $1735*

You pay for it today coz you're a baller. This is called the "London spot".

*Get her a LV bag next time

What if you lived in New York?

That will cost you $1738 Shout-out some minor shipping & storage costs.

You collect it just before your huns birthday. You're agreeing to a price now for an item you're collecting next month (futures contract)

Order site is called COMEX.

Usually the prices on "London spot" & COMEX are really close together. A couple of $.

The private school term is "futures-spot price differential".

But now it's COVID & nobody shipping anything. You're fucked. What happens to the COMEX price?

Exactly! It starts to move higher

"What's $50 to a mofo like me, can you please remind me?" - K. West

If you're a gold trader, it's ALOT.

The difference between COMEX & London spot reached up to $70. The most in decades!

Wall Street banks didn't see the divergence being this wide. They got burnt.

This has nothing to do with a shortage of gold. There's nearly 200k ounces out there. 120k is jewellery. Remaining 80k are private investments.

Problem is not being able to drop gold at the right locations.

Scarce logistics => harder to deliver => increase in prices

Investment banks have an army of guys in wool suits, flashing Audemars & chugging Armand de Brignac who rely on some Asian kid to work out the likelihood of a huge maximum loss.

Monte Carlo simulations are used for the worst case scenario called Value at Risk (VaR).

Ends badly.

"Black Swan" events (extremely unlikely events) are far more common than models predict

In an age of volatility, unpredictable politics, market shocks & turbulence, standard risk models do a terrible job of keeping it tight

Won't be the first (or last) time banks got wiped out!