Betting $1 Million On Gold Hitting $2,000 Before $1,000

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Published : May 21st, 2012
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With gold closing on $1,500, Peter Grandich recently reactivated his December 2011 bet that gold would hit $2,000 before it reached $1,000.

However, there is a flaw in the nature of the bet as it is possible for someone taking the bearish side of the bet to hedge themselves against any loss, nullifying what Mr Grandich is trying to achieve. The hedging strategy for the bear, assuming for simplicity the price at the time the bet is entered into is $1,500, is to buy 2,000 ounces at the time of the bet and then sell that gold when it first reaches either $1,000 or $2,000. Below are the cashflows for either outcome.



Of course the bear neither loses nor makes any money from the bet. The only risk they really take is reputational should they lose, but then they definitely benefit from a marketing exposure point of view (on the basis that any publicity is good publicity), from being respected for taking the bet, and also the chance they could win as well.

I would note that a bull could likewise hedge themselves by selling 2,000 ounces of gold and then later buying it back. However I am not accusing Mr Grandich of such a cynical marketing ploy, as I think it is clear he was/is willing to risk a real loss of his personal money on this bet, as evidenced by his December 30 post where indicated that he would assign his winnings to the many charities he is involved with.

So, I think it is back to the drawing board for the bulls to construct a bet that will really hurt (financially) a bear.

 

 

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