You are talking about using interest free loans from credit cards in order to make a leveraged bet on the price of gold; that is not arbitrage.
If gold decreases in price - and its close to record highs, however you want to intrepret that - you are taking a huge risk.
Maybe mentioning gold is "politically incorrect" and so I'm getting down votes and disagreement, when the gist of my comment was talking about different ways you could arbitrage to raise money for a startup.
i.e. I borrow $1k at 0% for one year. I put the money in a 1 year CD paying 1% interest. At the end of the year, I pay back the loan with the CD's principal, and put the $10 interest in my pocket.
Even if inflation were 2% (or 10%, or 100%), I am still making money - no matter how deflated the value of the dollar is, I still have more dollars in my pocket than when I started.
(Inflation hurts lenders of money, not borrowers)
This is also what makes gold a relevant possibility for this type of arbitrage. Since gold's supply is relatively fixed, as the dollar declines due to inflation, the gold price will appreciate. So, even if there were no increasing interest in gold from investors (e.g.: no appreciation due to increased demand) you'd be arbitraging the delta between the exchange rates of the two currencies. Borrowing in dollars and buying gold.
This could be, as I mentioned, done between any two currencies. Or, in the case of CDs, which I mentioned in my original comment, within the same currency.
But I guess that since I mentioned gold it is Very Important for you lot to say that gold is risky, and that I'm obviously falling to "mention" those things that I, uh, er, mentioned.
Meta: Not only did I read your whole initial parent post, I had also not mentioned a single word about "gold". So I am really intrigued by your negative tone and accusation of me jumping on the "anti-gold argument" bandwangon. Btw, I really enjoy reading your HN posts. But that doesn't prevent me from pointing out flaws in your logic. If my original reply sounded like an attack, then I guess I should be more careful in my wordings.
My original reply did account for the transaction fees in "pay no interest loans". I didn't use the same figure you did, but to pretend like I ignored it is wrong. If you had read my post, you would notice that I said that a "safe investment" like a CD would not give you a sufficient return at current CD rates, and so I talked about a hypothetical %6 CD.
Your original reply came as piling on, and since you didn't (and still haven't) recognized that I had addressed the issue you're bringing up, there's no way to distinguish you form the others who are jumping in and telling falsehoods about me based on their own financial ignorance.
I am quite dismayed that nobody has responded on the original point-- using arbitrage to finance your startup-- and instead people are trying to score points by attacking me as if this were reddit.
I'm already pretty hesitant to post to this site due to an expectation that I won't useful discussion in response. This is just convincing me more of it.... so, if you do enjoy reading my HN posts, know that I try my best when posting to avoid stepping on any of the land mines that will result in people attacking me, and I post as if I'm walking on eggshells. I thought that mentioning gold might be tolerated here, but I was wrong.
> Since gold's supply is relatively fixed, as the dollar declines due to inflation, the gold price will appreciate.
You are assuming that gold is "safe". It's not. If gold dives right when you need to pay back the card, you will start paying massive rates on the card. Not cool. Not even gold bugs suggest gold is a safe "no brainer" 6 month investment - there is a chance it will fall.
Big call - that gold will appreciate. Some people think that since the P/E of gold is effectively infinite, gold should be worth essentially nothing. Now, I'm fairly bullish on gold at the moment, but it's not guaranteed to appreciate. As credit collapses, cold hard cash becomes valuable, as you need it to buy the distressed assets of former paper-millionaires, or to invest in a much less congested market, or buy old tires to repair the soles of your kids shoes, so you actually go into deflation. And the US can sell off gold reserves if it gets in trouble (though there are conspiracy theorists who say this has already happened), and that would hurt gold prices.
If you get $10,000 from zero-interest credit cards, and put it a 6 month term 2% / year deposit, you debt is $10,000 (really $9,000 after massive inflation), while you get back $10,100 (really $9,090). So you made $100 (really $90, with some crazy inflation sucking up your winnings). A free $100 is arbitrage.
And old (and very similar) scheme was "Check kiting" - you cash a check (possibly for a very large amount), then deposit the money in your savings account (or use it as an emergency loan). Before the first check clears, you cash another check, and use it to cover the first one. If you miss a beat, you go to jail.
Instead of arbitraging the interest rates, you could make a leveraged bet on gold, houses (they always go up, because they 'aint makin' any more land, you know, and the population keeps increasing), shares, options, pork bellies, or cans of sardines. But the danger is, that some wacky market dynamic will wipe out your position, leaving you with a credit card debt you can't repay. Maybe you are a great investor, and know how to pick winners (and cover your downside) but great investors don't often need to borrow a few thousand off a credit card.
In that case, you'd be borrowing US dollars and buying, say, Greek Bonds. I picked that example because greek bonds have a high rate of return. They're also debt... you're getting debt in one market and selling it in another.
Greek Bonds obviously have risk. All arbitrage has risks, and those risks can be huge. That the risk is huge doesn't make it any less arbitrage.
FWIW, I don't think gold is at a particularly high price. I think the dollar and other currencies, which have been long over valued, are a little less overvalued than they were. I don't price gold in dollars, I price dollars in gold.
PS: Get a loan at 0% interest, buy an option on gold at 1000$ and short gold at 1100$. Now most of the time things are priced in such a way that you will lose money on this trade however if people are selling the options to cheaply then you could execute this trade and be guaranteed to make money. Assuming the people that sell you the option don't default. Unfortunately, you can make money by selling options worth more than your capital so you come out ahead on average and if bad things happen you are ridiculously broke but effectively still at zero. Sort of like me making a billion dollar bet that the redskins don't go undefeated this year, it's easy for me to price those risks based on the idea I would only go broke in such a way it they seem really attractive even if they are next to worthless.
Not a single response to my comment has been on the actual topic of this submission. Most of them have been frankly, dishonest, and the only thing I'm concluding from this is that this site is inhabited by people who are such financial neophytes that they think there's such a thing as a "riskless transaction".
So, no, you don't get to assert that I assumed something and then call me a liar when I point out that I didn't say it, especially in the face of me pointing out the difference between leverage investments or margin investments and arbitrage in the original comment, which is proof positive that I didn't say they were the same.
Or, well, you can do that, but you force me to conclude that this is not a place where intelligent discussion can take place.
Sorry, but on top of confusing leverage and arbitration (AKA arbitration works even if your not taking out a loan but you can use a loan's leverage to increase your return). Your also making the mistake that inflation is bad when you hold another asset. If you buy 1000$ worth of wood and you get significant inflation that wood is going to be worth more dollars not fewer dollars when you sell it. When you get a loan inflation is good and deflation is bad, when you give someone a loan inflation is bad and deflation is good.
PS: When you get a loan you are required to pay back X% more than than you borrowed but that percentage is normally independent of the inflation rate for some period of time. It's true that with CC they will adjust their rates based on inflation, but the only reason this could work is the rate is fixed for some period of time even if inflation changes.
All in a thread where I responded to someone who lied about what I said, and pointed out that I didn't say that at all, and in fact, I said the opposite.
But what I actually said does not matter to you, or others commenting here. You're dishonest, and a perfect example of why HN sucks for trying to have a worthwhile discussion.
"Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan." (This is Correct)
"This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but" (up to here everything is fine) "the monetary inflation rate over the time period." (This is literally true, but misses the point while inflation makes this easier not harder if inflation is meaningful your not doing arbitration.)
The point I am trying to make is if you have a 0 interest loan for 1 year and you buy a 1 year bond that pays 1% interest then great you have arbitrage. But, if you have that same loan buy a 2 year bond with a that pays 2% it's become speculation because the value of a 2 year bond in at 1 years is dependent on inflation and you either need to sell that bond at market rates or get a new loan. So, if inflation is important your not doing arbitration.
(Where price of money is a synonym for interest rate.)
The Greek Bonds you mention, you also consider 'money'. Well, not all 'money' is the same. That's why you get paid more if you buy Greek bonds than if you buy German Bonds, to the same Euro value: risk premium.
Its not arbitrage if you are just being paid for taking on risk, by definition.
You're right that gold is not the same as USD. It is less risky.
You'd do well to not tell me what I believe about various asset classes, especially when it is clear you have not even read the original comment I made.
By definition, people engaging in arbitrage are being paid to take the risk that the arbitrage might fail. The idea that there is such a thing as a risk-free form of property is fallacious.
Thus your arbitrary demand that I be talking about something risk free is an impossible standard (and quite off the point... but then, maybe derailing the possibility of sophisticated financial discussion was your goal?)
I mentioned hedging risk, and everything else you've brought up in my original comment.
Say you borrow $100k at 0% for 1 year. You then buy (at $1734/oz) ~57oz of gold. Next year, you plan to sell it and pay off your $100k.
But you've taken a risk. If gold is only $1500/oz next year, you're going to lose ~$13k. Of course, if its $2000/oz, you're going to make a nice profit. You're speculating on the gold market. You could build a similar position with gold futures, for example.
Arbitrage would be if you could take that $100k, and immediate buy gold in USD, sell it in EUR, and then buy USD with those EUR and wind up with >$100k. Then you're not taking any risk, because you can set up all those transactions practically at the same time (and the markets are liquid enough you know the prices you'll be able to buy/sell at).
If you're buying gold in SF for $100 and selling it in NYC for $101, you carry the risk that the price will move while you're executing the trade.
If you're doing the yen carry trade (borrowing yen, and lending dollars), you carry the currency risk.
If you're taking 0% credit card loans and buying CDs, you carry the default risk on the CDs (mitigated, of course, by the FDIC).
That said, I agree with your general point - buying gold with a 0% loan carries so much risk that it's really just a leveraged investment, not an arb opp.
There is no such thing as "not taking any risk" or a "risk free" investment. The idea that arbitrage is without risk is, kinda amusing, if you think about it.
Even buying the put options I described to protect the position involves risk, though it does reduce the level of risk dramatically.
As others have said, by definition, an arbitrage is risk free (or, in practice, nearly risk free).
Buying extremely risky Greek Bonds, with borrowed USD, is just making a leveraged investment.
Considering the transaction costs you'll pay, as a small time buyer, and the various worked in charges, you will certainly be losing out, when the risk etc is factored in.
Its a bad way to fund your startup; its up there with buying lottery tickets, or playing roulette to make more money: might work out ok, sometimes, or even all the times you try it - but its a negative expectation thing to do.
But hey, just keep on thinking that gold is very risky.... sucker.