Claude,
> OK.... you end up with a different quantity of grams of gold
> currencies.
Yes, but *different* and inequivalent currencies.
> > Niether e-gold nor gg are gold itself but contracts
> > that give the owner certain rights having to do with gold.
>
> I think that is where I will disagree. Both e-gold and gg are an
> undivided interest in a gold pool. That is not a contract but direct
> title of gold. You can redeem at any time your gold currencies for
> gold bars. Do you agree on this ?
Not entirely.
Both gg and e-gold derive their value from the rights, which are
contractual rights (altho in e-gold's case ever changing ones), their
owners have. They are gold derivatives. The princpal such right is the
right to redemption in actual gold. The actual details of this right:
what fees there are, how and where redemption takes place, whether or
not bailment is also possible, etc. alters the relationship between the
price of gold and the currencies.
That this right is legally derived from "an undivided interest in a
gold pool" in the case of gg and a trust arrangement in the case of
e-gold is legal gobledegook. It serves only to (hopefully!) give legal
effect to the owner's contractual rights and is of no value or meaning
in
and of itself beyond giving effect to those rights.
> > What you do end up with in the case you suggest is a different quantity
> > of gg than the quantity of e-gold you started with. In an arbitrage
> > you must end up with more of the *same thing* you started with. In
> > order for your suggested trade to be an arbitrage you would then have to
> > convert the gg back to e-gold in some other way such that you ended
> > up with more e-gold than you started with.
>
> Except for the bolts and nuts, both e-gold and goldgrams are the
> same...i.e. an undivided interest in a gold pool, titles to a piece of
> gold. The value of either currencies will always be 100% link to the
> price of the metal.
No they are not the same. They are a slightly different bundle of
rights
related to gold. "Title" means nothing except for the rights it confers
on the holder.
The value of the currencies is the value of the rights. The only
connection
between the value of the currencies and that of gold derives from the
arbitrage market between the gold currencies and bullion. In the case
of gg this connection is theoretically tight because both redemption and
delivery are possible. This is not the case for e-gold because bailment
is not accepted. Since e-gold can be redeemed, the value of e-gold will
not fall too far below that of gold. But without bailment e-gold is a
proprietary product whose price can be set at any arbitrary value above
that of gold (subject to the contraints of the secondary market, of
course) by the producer (G&SR) by restricting supply of new e-gold.
The above arbitrage constraints are not very real at the present time
because the trade in e-gold and, especially, gg are so small that there
are large inefficiencies due to costs, fees and lack of capital.
> It seems to me that the arbitrage is valid if both these currencies
> remain equivalent at all time in what they represent.
What is real is what rights their owners have and the value thereof.
What
they "represent" is just a fantasy.
Another way to think of whether of not what you propose is actually
arbitrage is the following. In a true arbitrage transaction (provided
market conditions stayed the same) you could keep doing it over and
over again, increasing your wealth on each cycle. What you proposed
is a one time transaction. You have only traded an overvalued item for
an undervalue one. This may be a shrewd thing to do but it is not
arbitrage.
Best,
CCS
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