{"id":518,"date":"2022-08-27T08:11:49","date_gmt":"2022-08-27T15:11:49","guid":{"rendered":"https:\/\/smartermarkets.media\/?p=518"},"modified":"2024-10-16T22:38:20","modified_gmt":"2024-10-17T05:38:20","slug":"when-markets-break","status":"publish","type":"post","link":"https:\/\/www.smartermarkets.media\/when-markets-break\/","title":{"rendered":"When Markets Break"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"518\" class=\"elementor elementor-518\" data-elementor-post-type=\"post\">\n\t\t\t\t<div class=\"elementor-element elementor-element-2ce32b7 e-flex e-con-boxed e-con e-parent\" data-id=\"2ce32b7\" data-element_type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-d3e05c7 elementor-grid-1 elementor-grid-tablet-2 elementor-grid-mobile-1 elementor-widget elementor-widget-loop-grid\" data-id=\"d3e05c7\" data-element_type=\"widget\" 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.elementor-icon-list-items.elementor-inline-items{margin-right:calc(-16px\/2);margin-left:calc(-16px\/2);}body.rtl .elementor-4220 .elementor-element.elementor-element-84a4e0d .elementor-icon-list-items.elementor-inline-items .elementor-icon-list-item:after{left:calc(-16px\/2);}body:not(.rtl) .elementor-4220 .elementor-element.elementor-element-84a4e0d .elementor-icon-list-items.elementor-inline-items .elementor-icon-list-item:after{right:calc(-16px\/2);}.elementor-4220 .elementor-element.elementor-element-84a4e0d .elementor-icon-list-item:not(:last-child):after{content:\"\";border-color:#999999;}.elementor-4220 .elementor-element.elementor-element-84a4e0d .elementor-icon-list-items:not(.elementor-inline-items) .elementor-icon-list-item:not(:last-child):after{border-top-style:solid;border-top-width:1px;}.elementor-4220 .elementor-element.elementor-element-84a4e0d .elementor-icon-list-items.elementor-inline-items .elementor-icon-list-item:not(:last-child):after{border-left-style:solid;}.elementor-4220 .elementor-element.elementor-element-84a4e0d .elementor-inline-items .elementor-icon-list-item:not(:last-child):after{border-left-width:1px;}.elementor-4220 .elementor-element.elementor-element-6115381{--divider-border-style:solid;--divider-color:var( --e-global-color-0dd84a5 );--divider-border-width:1px;}.elementor-4220 .elementor-element.elementor-element-6115381 .elementor-divider-separator{width:40px;}.elementor-4220 .elementor-element.elementor-element-6115381 .elementor-divider{padding-block-start:16px;padding-block-end:16px;}<\/style>\t\t<div data-elementor-type=\"loop-item\" data-elementor-id=\"4220\" class=\"elementor elementor-4220 e-loop-item e-loop-item-183 post-183 post type-post status-publish format-standard has-post-thumbnail hentry category-episode category-when-markets-break tag-energy-markets tag-market-events tag-natural-gas tag-risk-management tag-trading pmpro-has-access\" data-elementor-post-type=\"elementor_library\" data-custom-edit-handle=\"1\">\n\t\t\t<div class=\"elementor-element elementor-element-146ac4a e-flex e-con-boxed e-con e-parent\" data-id=\"146ac4a\" data-element_type=\"container\" id=\"episodes-loop\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-0a79101 elementor-hidden-mobile elementor-widget elementor-widget-theme-post-featured-image elementor-widget-image\" data-id=\"0a79101\" data-element_type=\"widget\" data-widget_type=\"theme-post-featured-image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-1-beau-taylor\/\">\n\t\t\t\t\t\t\t<img fetchpriority=\"high\" decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-1280x720.png\" class=\"attachment-large_sixteen_nine size-large_sixteen_nine wp-image-214\" alt=\"\" srcset=\"https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-1280x720.png 1280w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-768x432.png 768w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-1536x864.png 1536w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-320x180.png 320w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-640x360.png 640w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor-960x540.png 960w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e01-beau-taylor.png 1920w\" sizes=\"(max-width: 1280px) 100vw, 1280px\" \/>\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t<div class=\"elementor-element elementor-element-eef7d75 e-flex e-con-boxed e-con e-child\" data-id=\"eef7d75\" data-element_type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-27d2a0d elementor-widget__width-auto episode-number elementor-widget elementor-widget-text-editor\" data-id=\"27d2a0d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color bb-elementor-custom-size\">\t\t\t\tEpisode 1\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-1a63b80 elementor-widget__width-auto series-name elementor-widget elementor-widget-text-editor\" data-id=\"1a63b80\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color bb-elementor-custom-size\">\t\t\t\tWhen Markets Break\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-dac9a15 elementor-widget elementor-widget-theme-post-title elementor-page-title elementor-widget-heading\" data-id=\"dac9a15\" data-element_type=\"widget\" data-widget_type=\"theme-post-title.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\"><a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-1-beau-taylor\/\">Beau Taylor, Former Global Head of Energy Sales &#038; Trading, J.P. Morgan<\/a><\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-84a4e0d elementor-align-left elementor-widget elementor-widget-post-info\" data-id=\"84a4e0d\" data-element_type=\"widget\" data-widget_type=\"post-info.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<ul class=\"elementor-inline-items elementor-icon-list-items elementor-post-info\">\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-12c436a elementor-inline-item\" itemprop=\"datePublished\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-date\">\n\t\t\t\t\t\t\t\t\t\t<time>August 13, 2022<\/time>\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-5ac02e0 elementor-inline-item\">\n\t\t\t\t\t\t<a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-1-beau-taylor\/\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-custom\">\n\t\t\t\t\t\t\t\t\t\tEpisode Details \u2192\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/li>\n\t\t\t\t<\/ul>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6115381 elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"6115381\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-e85e782 elementor-widget elementor-widget-theme-post-content\" data-id=\"e85e782\" data-element_type=\"widget\" data-widget_type=\"theme-post-content.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"183\" class=\"elementor elementor-183\" data-elementor-post-type=\"post\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-bcb1c64 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"bcb1c64\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-6fcd24d\" data-id=\"6fcd24d\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-d2fc45a elementor-widget elementor-widget-html\" data-id=\"d2fc45a\" data-element_type=\"widget\" data-widget_type=\"html.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<iframe title=\"When Markets Break Episode 1 | Beau Taylor, Former Global Head of Energy Sales & Trading, J.P. Morgan\" allowtransparency=\"true\" style=\"border: none; min-width: min(100%, 430px);\" scrolling=\"no\" data-name=\"pb-iframe-player\" src=\"https:\/\/www.podbean.com\/player-v2\/?from=embed&i=8ped4-1298e5c-pb&share=1&download=1&fonts=Arial&skin=1&font-color=&rtl=0&logo_link=&btn-skin=c73a3a&size=150\" width=\"100%\" height=\"150\"><\/iframe>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-9904a71 episode-info elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"9904a71\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-656bd0b\" data-id=\"656bd0b\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-57f9368 elementor-widget elementor-widget-text-editor\" data-id=\"57f9368\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>In this episode, David Greely welcomes Beau Taylor, J.P. Morgan\u2019s Former Global Head of Energy Sales &amp; Trading, to recount his experience in the U.S. Natural Gas market following Hurricane Katrina. Together they explore the risk miscalculations, market conditions, and elements of human nature that led to one of the largest hedge fund collapses on record.<\/p><p>Greely and Taylor revisit how a multi-strategy hedge fund transformed into one big bet on winter natural gas prices, why their collapse didn\u2019t lead to wider systematic distress in the financial market, and what learnings we can apply to manage volatility in today\u2019s LNG markets better.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-86269df elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"86269df\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-ec4fbb8 elementor-widget elementor-widget-text-editor\" data-id=\"ec4fbb8\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color\">\t\t\t\t<p>Hosted By<\/p>\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-64a9be0 elementor-widget elementor-widget-text-editor\" data-id=\"64a9be0\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\tDavid Greely\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-707e1d41 episode-qa elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"707e1d41\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-inner-column elementor-element elementor-element-31223bbe\" data-id=\"31223bbe\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-60bfe0ee elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"60bfe0ee\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-61669c67 elementor-widget elementor-widget-heading\" data-id=\"61669c67\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">Episode Q&A<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-3c900f9f elementor-widget elementor-widget-text-editor\" data-id=\"3c900f9f\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>The following Q&amp;A is created using slightly edited excerpts from the episode transcript, optimized for readability. <a href=\"http:\/\/smartermarkets.media\/wp-content\/uploads\/2022\/09\/SM82_BeauTaylor_TranscriptFinal_20220827.pdf\" target=\"_blank\" rel=\"noopener\">Download full transcript<\/a>.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-163a2876 elementor-widget elementor-widget-accordion\" data-id=\"163a2876\" data-element_type=\"widget\" data-widget_type=\"accordion.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-accordion\">\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3721\" class=\"elementor-tab-title\" data-tab=\"1\" role=\"button\" aria-controls=\"elementor-tab-content-3721\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\"> DG: Over 30% of US gas production was in the Gulf of Mexico. At that point, Katrina shut down over 80% of it. Henry Hub, the delivery point for the Nymex natural gas futures contract was closed and declared force majeure. The US natural gas prices doubled overnight, but more than that, Hurricane Katrina ushered in a new and more volatile market regime in the US natural gas. This era saw the rise and fall of the hedge fund Amaranth, which lost 6 billion. When it collapsed a little over a year later, it was still one of the largest hedge fund collapses on record. Beau, you ran energy in sales and trading at JP Morgan during this period. Could you start us off by taking us back to that era? Starting with Hurricane Katrina, what was your experience trading and managing risk during such a chaotic event?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3721\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"1\" role=\"region\" aria-labelledby=\"elementor-tab-title-3721\"><p>BT: Natural gas, at the time, was an emerging market that was in the process of attempting to mature. Natural gas trading began in earnest with a number of pipeline companies, such as Enron. They began to make markets and trade the contracts much more aggressively, but, at the time, you had a largely surplus market where you had excess supply. You ultimately had to go to a price where you incentivized power facilities to burn gas, to balance the market whenever prices would get too high. The inverse would take place, and you\u2019d incentivize power plants to burn oil or alternative fuels. For a number of years, natural gas largely stayed in a relatively well-defined range, regardless of what the weather was, what happened with a hurricane or tropical events, or what happened in anything.<\/p><p>Hurricane Katrina was an interesting one because, I think, it caught people off guard. You had a scenario where you had a hurricane that largely looked like it was going to go into Florida, potentially as far north as hit land in Georgia or North Carolina. The market, not that they were sleeping on it, but the market had run up a little bit the weekend, on Friday before the weekend of Hurricane Katrina. The market sold off because it looked like a non-event. As soon as that happened, over the weekend, Hurricane Katrina hit the coast of Florida instead of dissipating. It made it to the other side of the coast of Florida, hit the warm waters of the Gulf, strengthened to an insanely strong hurricane, and started heading right towards the meat of the US natural gas market production.<\/p><p>At that point, anybody looking at balances for natural gas could see a credible scenario where the US simply would not have enough natural gas to get through winter. If enough production was damaged, if enough production could not come back online in the market, wasn\u2019t able to fill storage, at the point that they\u2019d anticipate that they needed to make it through the winter almost immediately. The price of natural gas doubled. You came home on Friday, and my natural gas is trading at $7 in MM BTU. When you woke up on Monday, natural gas was trading at $15 plus in MM BTU. The market was largely unglued because this was a scenario that the market hadn\u2019t priced in. The market did not have a number for how you price the potential to run out of natural gas.<\/p><p>Natural gas was incredibly volatile for a period of time. I think what happened during that period of time, whether it be the risk models that a number of people managed to use to manage risk, whether it be a number of the training models, whether even be option pricing models, everybody kind of recognized at that time that there are these known unknowns that exist. As soon as it looked like natural gas was going to settle down, all of a sudden, Hurricane Rita came through. Right after that follows almost the identical track. It went a little bit further west. So while Katrina took out a lot of the stuff and the Central Gulf, Rita came through and took out a number of the things in the Western Gulf. I think you had a credible crisis situation that the market largely wasn\u2019t ready for.<\/p><p>When you have an in-product, nobody\u2019s prepared to turn off the heat during the wintertime. You\u2019ve got to have some mechanism to balance that. Mechanism becomes price, but if that\u2019s the case, the market has shown you that prices could go well beyond the realm of volatility that had ever been witnessed. Hurricane Katrina and Rita started a new era in natural gas trading, where all of a sudden, now we\u2019re pricing for scarcity. We\u2019re not pricing for abundance. Everybody had to utilize all the models, whether they\u2019d be fundamental models, pricing models, or various technical models, which had to be readjusted. You were simply trading in a new era, and from that point on, the sky was the limit in terms of people\u2019s beliefs, in terms of where prices could go, and how far away they could go.<\/p><p>Were they delusional? Who knows, but you began to have a number of people trading very differently than they had in the past. For instance, spread trading became very aggressively traded. People would begin to trade the front winter contracts and sell the contracts further back in the storage season by putting a price on how likely you were to run out of natural gas and, if it did happen, what would the risk parameters be. You started seeing similar things with option pricing models where calls became much more expensive than puts because, in a crisis situation, there wasn\u2019t any known top for where the market could go. In risk models, people might have assumed that you had a certain amount of risk, short natural gas contracts, but that risk became much higher.<\/p><p>Even a modest amount of money going into Katrina, cutting across Florida, you lost insane amounts of money on Monday morning when you came back. Once again, a number of the traditional capital providers were forced to provide less capital simply because now we\u2019re in a new regime, in a new era where prices were potentially going to go much higher. That was largely on the heels of the various merchants, whether it be Enron, Diana G, or some other people who had financial problems in the early 2000s. You had a scenario where you had fewer liquidity providers than you had in the past. A number of the banks had gotten into the business and were able to provide liquidity, but they were in a position where they couldn\u2019t provide as much liquidity as they could in the past. They were looking at new risk models and riskier contracts. The market was calling for hedge funds to come in and provide additional liquidity. At that point, the only way to balance the market and liquidity was to find speculative capital willing to come in and take the other side of the commercial business. That would allow the markets to remain in balance, remain stable.<\/p><p>Katrina was the beginning of a new era that, in many ways, is echoing itself even today.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3722\" class=\"elementor-tab-title\" data-tab=\"2\" role=\"button\" aria-controls=\"elementor-tab-content-3722\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">Hurricane Katrina marks the beginning of the rise and fall of Amaranth and star natural gas trader Brian Hunter. There have been volumes written about Amaranth, the role of so-called widow maker trades, the spread trades, natural gas, and the failures in risk management. Let us walk through these so-called widow maker trades or being long, March short, or April futures; why are these trades so attractive and dangerous?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3722\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"2\" role=\"region\" aria-labelledby=\"elementor-tab-title-3722\"><p>Traditionally spread trading commodities is largely a function of what the physical market looks like at the time. For example, if you were in deficit, you need to attract commodities out of storage, and the near-term contracts will trade above the future contracts. It\u2019ll incentivize people to bring a physical commodity to market. Conversely, if you\u2019re in a scenario where you have excess, you need to create an incentive for people to store that excess. So the front month contract will trade below the forward contracts because people will buy the prompt contract. They\u2019ll put into storage, and they can maintain an arbitrage by selling those forward contracts. Generally, natural gas spread trading certainly wasn\u2019t anything new. There were certainly lots of people who traded very actively across the curve.<\/p><p>The difference was that for a number of years, you had a relatively predictable curve shift largely dependent on current fundamentals. And so, whatever the market needed to incentivize, the curve would largely function as a way to incentivize what it required in the physical market. What hurricane Katrina and Rita showed was that if you have a scenario where you have extreme tightness &#8211; you could have a window where prices go substantially higher than anything you\u2019d ever anticipated before. Therefore people became much more comfortable purchasing spread contracts beyond anything that might even have a historical basis. The market has shown that if something bad happens &#8211; you can have a payout on an event that\u2019s dramatic. The other thing you have with spreads is there\u2019s a lot of implicit leverage in spreads.<\/p><p>Whether it be the margin that you have to apply for futures, or contracts, the margin that you might have to apply for swaps because you have an offsetting buy-in sale, you can take a much larger position. Suppose you\u2019re making a bet that gas will run out by the end of winter. In that case, you can make that bet with substantial leverage without having to put up as much capital as if you were going to make that bet. For example, buying the futures contract outright without that offset. I think for a number of reasons, a lot of people were becoming enticed to make these different bets. Plus, from a pricing standpoint, many people were looking at the model similarly, right? They\u2019re looking at a model that had insufficient commodities to meet demand.<\/p><p>A number of people are pricing out this kind of hope, for lack a better term, that if something goes wrong, we will have a significant asymmetric payout. You mentioned Amaranth. They had made a significant amount of money because they\u2019d correctly predicted that if things got tied, or if there was a tropical event, or if there was some other thing that occurred &#8211; prices could go substantially higher in one contract versus another. They were one of the first big winners on some of these spread trades. They\u2019d been relatively ahead of the curve, specifically when you mention the risk and how it looks.<\/p><p>A bank doesn\u2019t necessarily have to make all of its money and energy. They tend to be incredibly quantitative about a number of different things when they\u2019re looking at risk, and a bank is going to be agnostic as to what the product is. I\u2019m not saying they view everything as a widget, but they\u2019ll certainly say that we\u2019re going to normalize things to units of risk. For example, at a place like JP Morgan or any other big banks, they would typically say, if you\u2019ve got significant volatility that\u2019s occurred in the recent past, it\u2019s going to factor heavily into that risk model. It\u2019s going to create an impact. It will limit what people can take in terms of risk in the bank\u2019s books and balance sheets.<\/p><p>The other issue with banks is that banks don\u2019t necessarily have to be in energy. They\u2019ve got lots and lots of different things they\u2019ll attempt to make money on. So if they view, whether it be natural gas or any product, as being excessively risky, at any point in time, you\u2019ll have liquidity, and that\u2019s going to pull back out of that market. So following Rita and Katrina, investment banks had a way of calibrating risk that tended to be much more conservative. It tended to be limiting in terms of risk. It tended to take some of the liquidity out of the market, even as additional banks were getting in. The financial players, the non-bank financial players, such as the hedge funds and others, employed teams of incredibly bright people in the field of risk. A number of the banks and financial institutions felt like this could easily get over our heads. We want to make sure that we aren\u2019t in a position to be adversely affected by these events.<\/p><p>They used sophisticated techniques to calibrate and determine what that risk may look like. Many of these people were very comfortable in how they looked at how they were calibrating. They were very comfortable in terms of the market&#8217;s liquidity and how they would view it going forward. So even then, you had an interesting dialectical where the banks were becoming more conservative. The non-bank participants were becoming more aggressive. The banks viewed this as excessively risky, and a number of the non-bank participants viewed it as highly opportunistic with scenarios that could throw off insanely high profits. If, for example, you had a scenario where prices did get incredibly tight, they were looking at asymmetric payouts in general.<\/p><p>They had profited from the Katrina and Rita debacle and were getting more aggressive as other people pulled out. They were coming in to fill the liquidity gap largely left by the non-bank participants or the bank participants, the pipeline companies, and others that had pulled out. At this point, you had teams of PhDs who\u2019d become incredibly comfortable with risk metrics. The flaw in their risk analysis was that they assumed a traditional level of liquidity for the market, where banks aggressively grew the risk in the market. At a time, the banks were pulling back; traditionally, you had a number of the pipeline players and others, the physical players that were extremely aggressive, that had largely pulled back.<\/p><p>Marginal liquidity was being traded back and forth amongst the hedge funds. The belief was that the liquidity pool happened to be substantially different and deeper than you might have seen in the real world when things began to come unglued. I think that dichotomy between how the banks and financial players looked at it versus how the non-bank players looked at it. It gave rise to volatility, where most of the people passing futures back and forth between each other weren\u2019t the people who had any intention of buying natural gas or selling natural gas in the physical market. People were largely making paper bets on the ultimate end of winter balances in natural gas.<\/p><p>You created a false sense of security. In some cases, you had echo chambers where the people looking at risk the same way were sharing ideas and comfort levels. There was a general belief that the market was in a new paradigm, and there was a new way to profit from the new paradigm. In contrast, there might have been a historical precedent, which may lead to more opportunity and put substantial capital behind those bets.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3723\" class=\"elementor-tab-title\" data-tab=\"3\" role=\"button\" aria-controls=\"elementor-tab-content-3723\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">There can be failures in sizing and the trades relative to the firm\u2019s capital and liquidity. There can be failures in sizing a trade relative to the size of the overall market you\u2019re in, and it sounds like there were both in the Amaranth case and how big some of these trades were relative to the size of the US natural gas market at that time?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3723\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"3\" role=\"region\" aria-labelledby=\"elementor-tab-title-3723\"><p>It\u2019s always amorphous, attempting to figure out exactly who has what and what the ultimate scale was, but what you certainly see over time is that you\u2019ll see a number of people who will take concentrated bets. And the general belief is that people believe they can be the market. People sometimes think they have a deep enough balance sheet to take on enough risk to wait out the other people coming in on the other side. For example, in a scenario like a March or April spread where the higher that market goes, the more physical incentives for different players who can store or withdraw from storage, to come in and make bets against. So when something gets out of whack, there\u2019s this belief that the old rules never applied. Still, the physical players are substantially larger than any financial player.<\/p><p>And so, when you have metrics that create substantial incentives for people in the physical market to react and act differently than they might have, you\u2019ll enhance liquidity coming into the market against your position. And it almost doesn\u2019t matter how right you think you are in the short term; you\u2019ll have substantial liquidity to balance the market from the physical players. Look at the situation like the March-April, where you had the spread up to a level where anybody that had any storage whatsoever was incentivized to sell their storage forward into that contract. They were incentivized to buy futures contracts to refill storage in the back end. So even if you\u2019d gotten to a lower storage level, some physical players felt like they had it within their system to monetize that.<\/p><p>At that point, once the market becomes more balanced, even if you\u2019ve got a substantial balance sheet, or even if you\u2019ve got a scenario where you\u2019ve got the fundamentals behind you; if the incentive structure changes and you get a balance of liquidity, effectively, you\u2019re making a bet that looks right, in case of normalizing within the weather. The chances are things will collapse, go back to lower levels, and certainly look to the extent that you have another tropical event. Or if you have something that causes weather to be much colder or something of that nature, it can certainly go higher. It\u2019s just that you might not have as much company to push prices much higher, and I think some of the things the PhDs and others would forget about when they were looking at the different models they were coming up with. In contrast, when Hurricane Katrina hit &#8211; you didn\u2019t have time to balance your system largely because half your system was gone.<\/p><p>It was either underwater or wiped out by the hurricane, versus if you\u2019re attempting to trade something a season in advance, the different participants in the physical market have time to react to those incentives and time to optimize their assets and take advantage of the incentives that the market\u2019s providing. I sometimes think if you\u2019ve not been in that market your entire career, the way a number of these PhDs and other people have been in the risk department, I think they are more focused on the different outcomes that you could have in a heavy tropical season or other things like that, without focusing on the fact that if you\u2019ve got a different set of incentives and a different set of timing for how quickly people can react, you\u2019re probably going to get very different outcomes. And I think that naive in terms of the scale and scope of the physical players and what they can do within their system to balance the market. Sometimes it can lead people to take risks that may be in excess of the risk they anticipated that they were taking.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3724\" class=\"elementor-tab-title\" data-tab=\"4\" role=\"button\" aria-controls=\"elementor-tab-content-3724\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">Often, early success is sometimes the worst thing to happen to a trader. Many of these types of human vulnerabilities seemed at play, driven by the early success in the wake of Hurricane Katrina. Between the new PhDs, the traders who made a lot of money during the five seasons, that overconfidence in oneself, the hesitancy of others to ask questions of someone who\u2019s been making a lot of money, and the ability to grow very rapidly, the assets that you can put at play and to leverage them up. Do you think that\u2019s true? And then, how do you protect against those types of vulnerabilities?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3724\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"4\" role=\"region\" aria-labelledby=\"elementor-tab-title-3724\"><p>We\u2019re all humans; we\u2019re moist robots where we respond to stimuli in certain ways; we\u2019re prone to want to believe the good things. We\u2019re prone to wanting to believe almost as a protective mechanism from psychology that these bad things can\u2019t happen to me, and if I were wrong, I\u2019d be able to get out, and if I&#8217;m right, I\u2019m going to make all this money. You see it a lot in a market like natural gas, where there\u2019s the opportunity to make a lot of money quickly. But the inverse is that there\u2019s an opportunity to lose an insane amount of money quickly. As humans and traders, we believe we will be on the right side of the big moves. But, unfortunately, many people kind of line up on the same side of the trade, and for a variety of reasons, whatever the fundamental outlook you were looking at, it can change very rapidly.<\/p><p>In a market like natural gas, figuring out what to do two days in advance is not easy. So, figuring out what will be six months or a year in advance is virtually impossible. A lot of times, what people would do is make bets predicated on large statistical analysis; in a different range of outcomes and how these other things could happen. But Mike Tyson once said everybody has a plan until they get punched in the face, which is what happens in natural gas. If you look at what happened, even with the fall going into what we described as the Amaranth collapse, you had a scenario where you had a heat wave coming in August prices were starting to rally.<\/p><p>It looked like Brian Hunter and the other people that were aggressively in this market; they were going to be proven right and that they were going to make a lot of money, and almost overnight, the forward weather outlook changed. You had some tropical events that seemed to dissipate. You had some heat events that seemed to dissipate. Then literally, almost overnight, you went from a scenario where the market looked incredibly tight to a scenario where the market looked potentially extremely loose. And so if you\u2019ve got a large position on, and you\u2019ve got limited ability to defend that position, or so to say to add incremental capital, you\u2019re largely a slave to whatever the market wants to do at the time. Even with the best analysis, even with the best team around you, even with the best insights, even with the best of everything, you can still lose an obnoxious amount of money because some unpredictable variable can change almost instantly and leave you extremely vulnerable.<\/p><p>This is why things such as liquidity management and various different other risk management techniques are so important. Liquidity is kind of there when you don\u2019t need it, but it\u2019s not always there when you do need it, and a lot of people get a false sense of confidence and self-assurance when we\u2019re in a market, and things are going their way, and they don\u2019t think they have to worry about getting out. They just assume that there will always be lots of bids to sell, and if you\u2019re trying to buy lots of offers and when things turn on a dime. You\u2019ve got an outsized position in the market; you\u2019re just in a position where it\u2019s really difficult to get out, and at that point, you are at the mercy of the market for where they\u2019re going to let you out.<\/p><p>At that point, it\u2019s almost impossible to figure out your true risk because your risk has nothing to do with fundamentals at that time. It simply has to do with liquidity and how you have to price this to find the liquidity you need to exit a significant position. You\u2019ve seen it happen in natural gas. You\u2019ve seen it happen in oil. You\u2019ve seen it happen in virtually every market, and unfortunately, time and time and time again, traders find themselves in these positions, not because of ill intentions or anything of that nature, but because of human nature because they\u2019re very comfortable when things are going their way, and people aren\u2019t always prepared for what the world looks like when things<br \/>go the other way and what that liquidity profile will look like then.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3725\" class=\"elementor-tab-title\" data-tab=\"5\" role=\"button\" aria-controls=\"elementor-tab-content-3725\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">The collapse of Amaranth was a successful failure. The firm collapsed, but the US natural gas market didn\u2019t. That\u2019s probably why when people think of hedge fund collapses, they think of long-term capital management, where there was a risk of the financial system being taken down. But, in the case of Amaranth, many people outside the commodity markets may not remember it because the market was okay, and I am curious why do you think that was, and how did this whole episode resolve itself?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3725\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"5\" role=\"region\" aria-labelledby=\"elementor-tab-title-3725\"><p>Think about the size and scale of that position by any metric. It was a large position in the absence of liquidity for a hedge fund, which has limited capital, which has investors who can redeem and has a scenario where when things go poorly, there are a number of risk management constraints. The kick forced the funds to act in certain different ways, and unfortunately, when there\u2019s a hedge fund that has a big position, and there\u2019s no way out of it; once you\u2019re at risk of exceeding whatever the capital is in that entity and if that risk gets transferred to a significant financial institution, like a large commercial bank or a large investment bank that has access to liquidity through various different government entities, that has a significant balance sheet that can create their liquidity in multiple different ways.<\/p><p>It might be a big loss. It might be something that could dent the balance sheet in one way, shape or form, but it\u2019s not something that could take that financial institution down. And in the case of Amaranth, when that risk went from relatively weekends, which is an investor product that had limited ability to post additional equity, to a large global investment bank in a commercial bank that had a substantial $3 trillion balance sheet. The risk to the mark and the systematic risk at that point was dramatically different. I think it\u2019s the reason you see the fed step in, and you see all these other different government entities step in to provide liquidity when things get funky and in a number of financial markets because ultimately, you need something much larger to provide the liquidity that you need to balance the market.<\/p><p>In the case of Amaranth, because it was isolated largely to one market that was dislocated, it was isolated largely to one firm that was participating significantly in that dislocation. Those positions could be transferred to a large global financial institution with a substantial balance sheet. Simply at that point, the systematic risk effectively disappeared. That risk wasn\u2019t going to be large enough to take down a bank the size and the scale of JP Morgan. It could have dented earnings, it could have done a number of different things, but it wasn\u2019t going to be able to provide the liquidity of those futures and other products needed. At that point, the systematic risk in the market was largely gone. It was simply a matter of trying to buy a little bit of time to find little liquidity, to balance out the pricing so that the market could get back to functioning in a much more normal way, which happened almost instantaneously within a few days. Market conditions were largely back to normal.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3726\" class=\"elementor-tab-title\" data-tab=\"6\" role=\"button\" aria-controls=\"elementor-tab-content-3726\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">After a decade of a relatively calm natural gas market created by the shell revolution, we\u2019re stepping back into a volatile gas market. This has already been happening in Europe, and winter will be coming. Another new regime was experienced in 05-06. What is your view on where we\u2019re heading and what lessons we should take with us?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3726\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"6\" role=\"region\" aria-labelledby=\"elementor-tab-title-3726\"><p>It\u2019s a great question, and it\u2019s quite scary because, many times, people don\u2019t necessarily know and learn from past mistakes and past things that have happened in the marketplace. But we went through a significant transition from traditional drilling techniques to shale drilling techniques, which ushered in largely a 10-plus year period of lower prices and less volatility. All the things that are good for consumers in the economy, in general, and now for a variety of reasons, the market is much more focused on lower sources of carbon to produce electricity, lower sources of carbon to heat and provide various different forms of energy and attempting to transition that in a relatively expedited fashion while we don\u2019t have the infrastructure in place to do that.<\/p><p>It\u2019s a challenge on a number of fronts because a number of the best technologies that we have for low carbon tend to be things such as solar or wind, which largely depend on whether the wind blows, whether the sun shines, and how long the sun shines. But, you can make a case, an aggregate as to over the year, how many hours you should get. Still, you don\u2019t know exactly what it will look like every day or even the following day, how it will look, and unfortunately, what that requires. It requires substantial backup generation, which tends to be inefficient and not particularly clean to subsidize.<\/p><p>I think a lot of people have very good intentions; there\u2019s a substantial amount of capital flowing into this in various different forms, whether it be research, whether it be infrastructure, whether it be other different things. We\u2019ve got a booming global economy that\u2019s becoming increasingly energy intensive. The present industries require extremely highly fine-tuned power. Power interruptions create massive problems. When we\u2019ve got a system that depends on reliability, it creates issues for everything we do. You\u2019re attempting to change that system with things that don\u2019t have that same level of reliability.<\/p><p>For example, if you look at Europe, which became largely dependent on Russian natural gas, they cut off a number of their nukes because of Fukushima to usher in larger-scale renewables across the continent. You had a scenario where for a variety of reasons, they hadn\u2019t gotten quite the output that they might have expected from the renewables when they needed it. They\u2019ve had trouble securing gas from Russia due to the Ukraine crisis. You\u2019ve got a scenario where even without cold weather, you have industrial shutdowns, and other things like that are occurring because they\u2019re struggling to get the fuel they need. Now they\u2019re looking at making changes such as not necessarily closing nuclear facilities that they\u2019d attempted to close otherwise.<\/p><p>You\u2019ve got a very finely tuned energy system, and you\u2019re disrupting that system. You\u2019re disrupting that<br \/>system with newer technology; that newer technology requires a substantial amount of backup if, for whatever reason, you don\u2019t get the output that you anticipated due to not having natural gas. Largely that backup in Europe is coal, and now you\u2019ve got largely the worst of both worlds. You\u2019ve got extremely high prices and a low level of reliability, and you\u2019re going to have some of the highest carbon output they\u2019ve had in years because they\u2019ve been forced to depend on coal generation to fill the gaps. When you look forward and see the same things occurring in the United States, where you\u2019re going to have a much more volatile regime where everything\u2019s working well, there\u2019s the potential for prices to go negative.<\/p><p>If there\u2019s too much wind, sun, or anything, you can potentially have too much power for the system, and you have to find a way to sync that power one way or the other. Conversely, if you\u2019re not getting the conditions you need, you\u2019re likely to see substantially higher prices, and there are two trains of thought. One train of thought &#8211; we should do a little bit more of everything, and if we do that, at least we\u2019ll have reliability and give ourselves a chance to get to whatever that endpoint is. But do it in a very responsible way. And others feel like we\u2019re here right now; we need to do it. We need to kind of force the issue. Unfortunately, suppose you\u2019re wrong by forcing the issue. In that case, you end up with situations like the one you currently have in Europe, where you have low-level reliability and extremely high prices. You have a scenario where you have a much worse carbon footprint than you would\u2019ve had if you were simply smart about the mix of resources you use and your transition responsibly.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-3727\" class=\"elementor-tab-title\" data-tab=\"7\" role=\"button\" aria-controls=\"elementor-tab-content-3727\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">I guess that volatility will attract a new generation of traders, and hopefully, they\u2019ll remember some of the risk management lessons. What do you think the odds of that are?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-3727\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"7\" role=\"region\" aria-labelledby=\"elementor-tab-title-3727\"><p>I think, unfortunately, what happens is that you have these cycles, and a number of the people that<br \/>were extremely active. Fifteen years ago, when these things occurred, they moved on to other things over time and throughout their career. Conversely, people can read about these things. Still, a lot of times, until they\u2019ve been on the other side of a trade that they couldn\u2019t control, it\u2019s hard to know how painful that can be or how difficult it is to manage in that situation. And on top of that, you probably have less investor capital in the space because people have pulled back from investing in funds that focus on hydrocarbons. And the banks have largely been focused on facilitating consumer businesses.<\/p><p>You don\u2019t have the same level of trading that you\u2019ve seen out of the pipeline companies and the physical companies. And so you\u2019ve got a market that\u2019s much more vulnerable now than it\u2019s been in quite some time with a backdrop. That\u2019s potentially much more volatile than it\u2019s been in quite some time, and I think that combinations are very dangerous. I think anybody attempting to trade in those markets and take advantage of what they view as opportunities just has to be careful; they have to be thoughtful. They have to look back to the lessons of the past. If they\u2019re smart about it, there is massive untapped potential, and I think you will have one of the most interesting tradings ranges you\u2019ve had in years over the course of the next few years. But I think a tremendous amount of money can potentially be made during that window. But if people aren\u2019t careful, if they don\u2019t learn the lessons in the past, if they don\u2019t recognize their flaws and their human nature, they will find themselves extremely exposed. And I think history could repeat itself time and time again.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div data-elementor-type=\"loop-item\" data-elementor-id=\"4220\" class=\"elementor elementor-4220 e-loop-item e-loop-item-184 post-184 post type-post status-publish format-standard has-post-thumbnail hentry category-episode category-when-markets-break tag-gold tag-market-events tag-risk-management pmpro-has-access\" data-elementor-post-type=\"elementor_library\" data-custom-edit-handle=\"1\">\n\t\t\t<div class=\"elementor-element elementor-element-146ac4a e-flex e-con-boxed e-con e-parent\" data-id=\"146ac4a\" data-element_type=\"container\" id=\"episodes-loop\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-0a79101 elementor-hidden-mobile elementor-widget elementor-widget-theme-post-featured-image elementor-widget-image\" data-id=\"0a79101\" data-element_type=\"widget\" data-widget_type=\"theme-post-featured-image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-2-david-gornall\/\">\n\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-1280x720.png\" class=\"attachment-large_sixteen_nine size-large_sixteen_nine wp-image-215\" alt=\"\" srcset=\"https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-1280x720.png 1280w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-768x432.png 768w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-1536x864.png 1536w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-320x180.png 320w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-640x360.png 640w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall-960x540.png 960w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e02-david-gornall.png 1920w\" sizes=\"(max-width: 1280px) 100vw, 1280px\" \/>\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t<div class=\"elementor-element elementor-element-eef7d75 e-flex e-con-boxed e-con e-child\" data-id=\"eef7d75\" data-element_type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-27d2a0d elementor-widget__width-auto episode-number elementor-widget elementor-widget-text-editor\" data-id=\"27d2a0d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color bb-elementor-custom-size\">\t\t\t\tEpisode 2\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-1a63b80 elementor-widget__width-auto series-name elementor-widget elementor-widget-text-editor\" data-id=\"1a63b80\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color bb-elementor-custom-size\">\t\t\t\tWhen Markets Break\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-dac9a15 elementor-widget elementor-widget-theme-post-title elementor-page-title elementor-widget-heading\" data-id=\"dac9a15\" data-element_type=\"widget\" data-widget_type=\"theme-post-title.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\"><a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-2-david-gornall\/\">David Gornall, Former Chairman, LBMA London Bullion Market Association<\/a><\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-84a4e0d elementor-align-left elementor-widget elementor-widget-post-info\" data-id=\"84a4e0d\" data-element_type=\"widget\" data-widget_type=\"post-info.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<ul class=\"elementor-inline-items elementor-icon-list-items elementor-post-info\">\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-12c436a elementor-inline-item\" itemprop=\"datePublished\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-date\">\n\t\t\t\t\t\t\t\t\t\t<time>August 20, 2022<\/time>\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-5ac02e0 elementor-inline-item\">\n\t\t\t\t\t\t<a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-2-david-gornall\/\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-custom\">\n\t\t\t\t\t\t\t\t\t\tEpisode Details \u2192\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/li>\n\t\t\t\t<\/ul>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6115381 elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"6115381\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-e85e782 elementor-widget elementor-widget-theme-post-content\" data-id=\"e85e782\" data-element_type=\"widget\" data-widget_type=\"theme-post-content.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"184\" class=\"elementor elementor-184\" data-elementor-post-type=\"post\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-eb4cb84 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"eb4cb84\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-0fc4f32\" data-id=\"0fc4f32\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-e5ad1fc elementor-widget elementor-widget-html\" data-id=\"e5ad1fc\" data-element_type=\"widget\" data-widget_type=\"html.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<iframe title=\"When Markets Break Episode 2 | David Gornall, Former Chairman, LBMA London Bullion Market Association\" allowtransparency=\"true\" style=\"border: none; min-width: min(100%, 430px);\" scrolling=\"no\" data-name=\"pb-iframe-player\" src=\"https:\/\/www.podbean.com\/player-v2\/?from=embed&i=sn7a8-12a2951-pb&share=1&download=1&fonts=Arial&skin=1&font-color=&rtl=0&logo_link=&btn-skin=c73a3a&size=150\" width=\"100%\" height=\"150\"><\/iframe>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-0ce4ad0 episode-info elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"0ce4ad0\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-c669c3d\" data-id=\"c669c3d\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-22182a6 elementor-widget elementor-widget-text-editor\" data-id=\"22182a6\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>In this episode, SmarterMarkets\u2122 host David Greely welcomes David Gornall, the former Global Head of Precious Metals Trading at Natixis and Former Chairman of the London Bullion Market Association (LBMA).<\/p><p>Together, they discuss the massive dislocation between the gold markets in New York and London in March 2020 during the early days of the COVID-19 lockdown.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-2a4286b elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"2a4286b\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-79726c1 elementor-widget elementor-widget-text-editor\" data-id=\"79726c1\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color\">\t\t\t\t<p>Hosted By<\/p>\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-ed7b17e elementor-widget elementor-widget-text-editor\" data-id=\"ed7b17e\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\tDavid Greely\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-45a8a0ee episode-qa elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"45a8a0ee\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-inner-column elementor-element elementor-element-7b955234\" data-id=\"7b955234\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-4032080 elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"4032080\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-70a2fbeb elementor-widget elementor-widget-heading\" data-id=\"70a2fbeb\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">Episode Q&A<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-9a8da28 elementor-widget elementor-widget-text-editor\" data-id=\"9a8da28\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>The following Q&amp;A is created using slightly edited excerpts from the episode transcript, optimized for readability. <a href=\"http:\/\/smartermarkets.media\/wp-content\/uploads\/2022\/09\/SM83_DavidGornall_TranscriptFinal_20220907.pdf\" target=\"_blank\" rel=\"noopener\">Download full transcript<\/a>.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-47c717b8 elementor-widget elementor-widget-accordion\" data-id=\"47c717b8\" data-element_type=\"widget\" data-widget_type=\"accordion.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-accordion\">\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1201\" class=\"elementor-tab-title\" data-tab=\"1\" role=\"button\" aria-controls=\"elementor-tab-content-1201\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">DG: Why is the price spread between London and New York important in the gold market? How big of a deal was it to market participants that it reached $60 or more per troy ounce?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1201\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"1\" role=\"region\" aria-labelledby=\"elementor-tab-title-1201\"><p>DG: Well, we should say that the new premium over London has always been a few cents and sometimes a few dollars an ounce. So for the market to move up to $67, this was a seismic move that the risk of this differential, or which we call the EFP, was modeled to be around a dollar, or say a dollar and half, and stress tested to around five. The other important aspect of the gold market is that the physical over-the-counter spot market is in London, and the futures market is in New York. What we\u2019ll see as a physical gold that\u2019s held in London, typically hedged with a short futures contract deliverable in New York. There are good reasons why this is the preferred hedge mechanism of a physical trader. First of all, the futures offer a price spread that\u2019s narrow, stable, and often yields a better forward contango than London OTC forwards. The exchange age also removes the OTC bilateral credit risk that an OTC trade carries, as the differential widens, anyone with a short hedge was getting squeezed. So the exchange margin calls would force banks to decide on whether to maintain the short, pay the margin and try and deliver or close out and pay the loss.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1202\" class=\"elementor-tab-title\" data-tab=\"2\" role=\"button\" aria-controls=\"elementor-tab-content-1202\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">DG: The COVID-19 pandemic was incredibly disruptive across markets in the global economy, but was there something particular about the market structure of the gold market that made it especially vulnerable to an event like this?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1202\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"2\" role=\"region\" aria-labelledby=\"elementor-tab-title-1202\"><p>To evaluate the vulnerability, we should define this part of the market structure as five risk factors. The location difference, which translates to your logistical risk. The size of the barrage you mentioned in each market &#8211; we call that the fungibility risk of metal. The next thing is expert physical trading knowledge. Then there are exchanges, internal position limits, and then you\u2019ve got the bank\u2019s own risk appetite and limit. So there are five things that all play out. At various times during this dislocation, at least one of these factors prevailing to affect the price. And that it\u2019s high, all five of them played a part in the story. One thing about the peculiarity of having a physical spot market in London and futures contract deliverable in London is this inter-deliverability factor.<\/p><p>The relocation of gold from predominantly Swiss refineries was prevented by a ban on passenger flights globally at the time. The other issue was the size of the bar. So in New York, it\u2019s a 100-ounce bar that\u2019s deliverable. Whereas the size of the bar traded in London is 400, and they\u2019re not into deliverable. Apart from the existing stock that sits on exchange, any new 100-ounce or kilo bar must be produced to order. So from a refiner\u2019s perspective, this is a just-in-time premium variety of gold, so you won\u2019t usually find them lying around in volts, waiting to be traded, and so there are about five refineries in Switzerland; there may be eight in total, globally that regularly cast and deliver eligible exchange bars. The other aspect of this was two types of participants in the market.<\/p><p>The physical trades largely trade both markets of London and New York separately, but they\u2019ll also trade both at the same time using an AFP, which is a single trade that simultaneously, in this example, buyers, futures, and sales London at a market rate that represents the price difference between the two. Then there are the financial electronic traders who trade fudges in New York and won\u2019t hedge by trading OTC London. In most cases, the financial futures traders weren\u2019t set up to trade the EFP with the OTC physical market. So when they were caught with shorter futures, they were only left with one option. They could only buy back their futures position on the exchange and thus driving the price higher. So physical hedges would normally close out their risk of London and New York by buying the EFP.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1203\" class=\"elementor-tab-title\" data-tab=\"3\" role=\"button\" aria-controls=\"elementor-tab-content-1203\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">Could you explain what an EFP is, the exchange for physical?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1203\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"3\" role=\"region\" aria-labelledby=\"elementor-tab-title-1203\"><p>It\u2019s a trade that simultaneously involves the purchase of the exchange in the sale of OTC or vice versa, at a rate differential in US dollars per ounce. So, you can buy the futures and sell the OTC in one trade or contract.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1204\" class=\"elementor-tab-title\" data-tab=\"4\" role=\"button\" aria-controls=\"elementor-tab-content-1204\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">So that would be the main way of playing between London and New York, in the context of the gold market?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1204\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"4\" role=\"region\" aria-labelledby=\"elementor-tab-title-1204\"><p>Yes, because it avoids leg lifting. So rather than having to go on and trade, if you have a physical trade, you are allowed to put it onto the exchange under the exchange rules. This means you can eliminate the risk between the two markets without going through two venues.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1205\" class=\"elementor-tab-title\" data-tab=\"5\" role=\"button\" aria-controls=\"elementor-tab-content-1205\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">And probably having to post collateral and margin on both?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1205\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"5\" role=\"region\" aria-labelledby=\"elementor-tab-title-1205\"><p>Yes. I mean, you\u2019re not going to remove the two sets of fees on it, but it\u2019s certainly removing the price differential risk that you\u2019re going to run while you decide whether you are going to do the futures or the OTC.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1206\" class=\"elementor-tab-title\" data-tab=\"6\" role=\"button\" aria-controls=\"elementor-tab-content-1206\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">Can you walk us through how that event was experienced in the markets?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1206\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"6\" role=\"region\" aria-labelledby=\"elementor-tab-title-1206\"><p>For most people sitting there, watching this unfold, there wasn\u2019t any correction; bid followed bid. So as the futures became bid and the prices rose, the electronic futures market makers chased the price higher. We\u2019ve talked about how the futures traders didn\u2019t use the EFP to liquidate their shorts. So if they did use the EFP, they wouldn\u2019t have chased it as high. However, the FP market did become a liquid and probably wouldn\u2019t help them in the end. But, the result was that the new futures prices rose much quicker than the London spot. As for the supply, without adjusting time, stock of hundred-ounce bars or kilo bars, and no refiner is open at the time to create them. The market was left traveling in one direction at a velocity.<\/p><p>If you had been fortunate enough to hold eligible material at one of the refineries, you could have thought you were in a better position, but then there were no flights. So one of the things that people don\u2019t really know about the gold market is that gold isn\u2019t moved around in a commercial way that is on freighters. They sit in the cargo hold of passenger aircraft. And if you\u2019re traveling between gold hub to gold hub, you may well be sitting on a pile of gold underneath you, and that\u2019s the way it\u2019s moved. So when that mode of transport dried up, so was the ability to deliver gold from hub to hub. And after that, when things reopened in the refineries, we had this mass of flight bookings.<\/p><p>And so we ran out of capacity because of how much gold fits on an aircraft. With many airlines not moving passengers around, they quickly turned these planes into cargo planes. I\u2019ve seen some pictures where they simply put them on the seats and stacked them neatly in places people usually would\u2019ve been, which helped alleviate some of the problems. But in reality, the banks got caught with the short hedge and the negative variation margins, which ranged between several hundred million and a billion, according to what they stated publicly, such as the size of their market losses. They were huge in magnitude, probably six to seven standard deviations away from any market risk model. So we can say it was a Black Swan event. It definitely undermined the ability to manage market price risk by using this method of futures hedging versus London gold holdings.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1207\" class=\"elementor-tab-title\" data-tab=\"7\" role=\"button\" aria-controls=\"elementor-tab-content-1207\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">If you were if you\u2019re a gold trader in London and you\u2019re trying to manage your risk properly by shorting futures in New York exchange, and suddenly, that price is bidding up away from you. So your risk management is the leading cause of your pain now, and there\u2019s no way to cover your short, because you can\u2019t get the hundred-ounce bars that you would need to deliver in New York. So you\u2019re stuck, and the price is chasing up away on you. How were the participants in London dealing with that?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1207\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"7\" role=\"region\" aria-labelledby=\"elementor-tab-title-1207\"><p>Once they\u2019d overcome the two of those five risks, you would\u2019ve thought then it was plain sailing after there. So then, we introduced the other three risks which are the risk models, and the knowledge or ability to deliver, those were the limits. We mentioned that some participants that had delivered gold in that delivery month, reached their exchange limit. So the exchange place a limit on what you can deliver during the active month. And you weren\u2019t allowed or able to make a second one. There were some exemptions permitted, but they weren\u2019t the norm. The second problem was overcoming those obstacles. Some of the traders had metal in the right place, on the right side of the Atlantic, had the position limits, and were about to pull the trigger.<\/p><p>And they were prevented from doing so by their risk managers, who said that this was creating more risk. And they were told to take the hedge off, move the goal back to an OTC vault, and don\u2019t put anymore onto the exchange. So whilst people have thought that they\u2019ve got the upper hand in this arbitrage, they hadn\u2019t quite got it. There was another frustrating one that hadn\u2019t been accustomed to delivering metal to exchange that; it\u2019s quite a nuanced process. And if you haven\u2019t done it before, you realize that you need an experienced person to complete the transfer efficiently in the timeframe allowed. Because no one\u2019s going to help you to figure it out in a short timeframe. So we have a perfect storm.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1208\" class=\"elementor-tab-title\" data-tab=\"8\" role=\"button\" aria-controls=\"elementor-tab-content-1208\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">I want to come back to the point about the risk management. So for you were saying for traders who had gold of the right size in New York who were under their position limits, they could have delivered it into exchange that was screaming for that it needed metal. What was the risk management thought process that said -  no, put it back in an OTC vault in New York? Or was it shipped back to London at that point?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1208\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"8\" role=\"region\" aria-labelledby=\"elementor-tab-title-1208\"><p>It was shipped back to London because of the model factor. There\u2019s always a number that a risk manager uses to say, what is fair value? So if you\u2019re going to measure this differential and it\u2019s only ever traded between $1 and $5 over the last 50 years, then that\u2019s the number you\u2019ll use. But if it throws out a $70 differential, it breaks all the dials on the dashboard. There\u2019s no way of resetting it. A lot of these models are looked at regressively and they look at it over a period of time. So once it breaks, it doesn\u2019t just break for that day or that month. It stays within the risk, sometime, for a year or two years thereafter until it levels out. It has some long term implications for the futures market.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-1209\" class=\"elementor-tab-title\" data-tab=\"9\" role=\"button\" aria-controls=\"elementor-tab-content-1209\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">Outside of what was happening in gold, New York and London, were there other problems at the same time in the wider gold market or the wider, precious metals markets that had to be dealt with as well?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-1209\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"9\" role=\"region\" aria-labelledby=\"elementor-tab-title-1209\"><p>Let\u2019s look at the wider gold market. It wasn\u2019t just London and New York that was affected by this. In China there was the largest discount ever seen to London. So from New Yorkit was monumental and the same was going on in India. You have to realize what the Western mantra is to hoard gold in times of turmoil. It\u2019s the rainy day fund. Whereas the Asians tend to use gold in that time. Where there is turmoil, they tend to dishold and then they go to cash. This was their rainy day, and so they\u2019re cashing out. And the opposite effect is happening. So you\u2019ve got massive discounts in China and India and didn\u2019t explore before somebody said why don\u2019t you just connect those two, they have to remain within the country. And that\u2019s probably one of the reasons why they went to an even deeper discount. In terms of broader, precious metals, we saw the same differentials occurring in silver and platinum, all the way down the supply chain to the coin market. We ended up around a hundred dollars premium. It wasn\u2019t just London, New York. That was just one example of how the dislocation happened.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-12010\" class=\"elementor-tab-title\" data-tab=\"10\" role=\"button\" aria-controls=\"elementor-tab-content-12010\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">When you speak of the dislocations in the silver market, as an example, was that similar reasons for the gold market?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-12010\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"10\" role=\"region\" aria-labelledby=\"elementor-tab-title-12010\"><p>It\u2019s not quite the same thing because the standards are very similar. You can move bars, but you don\u2019t put silver on an aircraft when it\u2019s $20 an ounce. Typically, you would ship silver by sea freight container and that\u2019s when you can find them. We\u2019ve all heard about the problems of supply chain management for a lack of vessels, a lack of containers and so silver got caught up in that very typical supply chain problem, even though the bars with the same size in London as they were in New York.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-12011\" class=\"elementor-tab-title\" data-tab=\"11\" role=\"button\" aria-controls=\"elementor-tab-content-12011\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">What brought this event to a resolutio? Did it resolve of itself naturally over time? Or did participants regulators have to step in and sort things out?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-12011\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"11\" role=\"region\" aria-labelledby=\"elementor-tab-title-12011\"><p>I think the answer to that was it happened in increments over a period of time. We\u2019ve got the active futures months. So it did take a few months to unwind and when gold did start to flow into exchange at the end, we actually saw temporarily a discount to London, but that didn\u2019t last very long. The answer is that it did resolve itself, as the four of the five main risks became manageable. Did the regulators get involve? Not really. CME is a self-regulatory organization and they were creating another delivery point in London for 400 ounce bars, but that contract was new and it wasn\u2019t inter deliverable with the hundred ounce liquid futures contract, so it really didn\u2019t have too much of an effect. Together, the traders and the risk managers thought it was more prudent to keep some gold in New York from now on. Certainly it\u2019s the case when some traders keep more gold in New York than they ever did before.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-12012\" class=\"elementor-tab-title\" data-tab=\"12\" role=\"button\" aria-controls=\"elementor-tab-content-12012\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">Did this leave a lasting impression on traders and risk managers behavior? Did that changed some of those dynamics about how the gold traders, in London, hedge their risk and how they think about that?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-12012\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"12\" role=\"region\" aria-labelledby=\"elementor-tab-title-12012\"><p>Risk managers have longer memories than traders do. I think the traders were looking forward to getting back on the horse and do business as usual, but the risk manager\u2019s never going to let them forget it. So the answer is that there\u2019s a lot more prudence involved in managing those risks and positions. Many people did question this whole structure of the market and how it came to be and it led people to think about how to build a more fungible global system of liquidity, not just one in London, but in multiple delivery points. But as the market corrected itself, a lot of people lost interest in trying to find a long term resolution, it was just too hard to do. That idea got put on the back burner. Will it come back again? Maybe.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-12013\" class=\"elementor-tab-title\" data-tab=\"13\" role=\"button\" aria-controls=\"elementor-tab-content-12013\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">How vulnerable do you see the gold market being to this sort of thing happening again?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-12013\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"13\" role=\"region\" aria-labelledby=\"elementor-tab-title-12013\"><p>The two things I\u2019ve noticed, aside from the reduction in limits, was the greater use of forward London hedging. Whilst some believe that the futures is a much more efficient way of hedging because of its liquidity, simplicity and lack of counterparty risk. The alternative way was to go back to OTC forward hedging, that\u2019s what we\u2019ve seen when we look at the trade data. The 6 million ounce daily average of forwards and swaps on gold in London, after this event, became 10 million and it remained 10 million. I think, it\u2019s still the same today and it had peaks of 15, 20 million ounce. What it means is that the system of using futures to hedge physical isn\u2019t as widely used as it was before the dislocation event.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-accordion-item\">\n\t\t\t\t\t<div id=\"elementor-tab-title-12014\" class=\"elementor-tab-title\" data-tab=\"14\" role=\"button\" aria-controls=\"elementor-tab-content-12014\" aria-expanded=\"false\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon elementor-accordion-icon-right\" aria-hidden=\"true\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-closed\"><i class=\"fas fa-plus\"><\/i><\/span>\n\t\t\t\t\t\t\t\t<span class=\"elementor-accordion-icon-opened\"><i class=\"fas fa-long-arrow-alt-up\"><\/i><\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t<a class=\"elementor-accordion-title\" tabindex=\"0\">When you look to the future, what do you see as a more robust way of building the gold market? What do you think you would change if you could?<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<div id=\"elementor-tab-content-12014\" class=\"elementor-tab-content elementor-clearfix\" data-tab=\"14\" role=\"region\" aria-labelledby=\"elementor-tab-title-12014\"><p>It\u2019s not for one person to say what they would change, it\u2019s for one person to listen to what everybody else would like to see. I think people would like to see a bigger and more developed gold market. I think they\u2019d like to see the local centers being more included rather than acting as outlying hubs. The synergy is a global market rather than having outliers, and you\u2019ll get more connectivity, you pull more liquidity, and that\u2019s what everybody wants at the end of the day. Nobody wants to deal in a pool of liquidity that evaporates as this differential did in 2020. The deepest pool of liquidity will always win. It\u2019s really up to the users of the market to come up and design their own future proof system that allows everybody to have access and to remove some of the barriers that we\u2019ve seen in these examples, that can be very disruptive to the market.<\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div data-elementor-type=\"loop-item\" data-elementor-id=\"4220\" class=\"elementor elementor-4220 e-loop-item e-loop-item-490 post-490 post type-post status-publish format-standard has-post-thumbnail hentry category-episode category-when-markets-break tag-decarbonization tag-energy tag-energy-security tag-energy-transition tag-market-events tag-oil pmpro-has-access\" data-elementor-post-type=\"elementor_library\" data-custom-edit-handle=\"1\">\n\t\t\t<div class=\"elementor-element elementor-element-146ac4a e-flex e-con-boxed e-con e-parent\" data-id=\"146ac4a\" data-element_type=\"container\" id=\"episodes-loop\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-0a79101 elementor-hidden-mobile elementor-widget elementor-widget-theme-post-featured-image elementor-widget-image\" data-id=\"0a79101\" data-element_type=\"widget\" data-widget_type=\"theme-post-featured-image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-3-arjun-murti\/\">\n\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1280\" height=\"720\" src=\"https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-1280x720.png\" class=\"attachment-large_sixteen_nine size-large_sixteen_nine wp-image-491\" alt=\"\" srcset=\"https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-1280x720.png 1280w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-768x432.png 768w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-1536x864.png 1536w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-320x180.png 320w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-640x360.png 640w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti-960x540.png 960w, https:\/\/www.smartermarkets.media\/wp-content\/uploads\/2022\/08\/smarter-markets-img-s13e03-arjun-murti.png 1920w\" sizes=\"(max-width: 1280px) 100vw, 1280px\" \/>\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t<div class=\"elementor-element elementor-element-eef7d75 e-flex e-con-boxed e-con e-child\" data-id=\"eef7d75\" data-element_type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-27d2a0d elementor-widget__width-auto episode-number elementor-widget elementor-widget-text-editor\" data-id=\"27d2a0d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color bb-elementor-custom-size\">\t\t\t\tEpisode 3\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-1a63b80 elementor-widget__width-auto series-name elementor-widget elementor-widget-text-editor\" data-id=\"1a63b80\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color bb-elementor-custom-size\">\t\t\t\tWhen Markets Break\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-dac9a15 elementor-widget elementor-widget-theme-post-title elementor-page-title elementor-widget-heading\" data-id=\"dac9a15\" data-element_type=\"widget\" data-widget_type=\"theme-post-title.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\"><a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-3-arjun-murti\/\">Arjun Murti, Former Head of Energy Equity Research, Goldman Sachs<\/a><\/h3>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-84a4e0d elementor-align-left elementor-widget elementor-widget-post-info\" data-id=\"84a4e0d\" data-element_type=\"widget\" data-widget_type=\"post-info.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<ul class=\"elementor-inline-items elementor-icon-list-items elementor-post-info\">\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-12c436a elementor-inline-item\" itemprop=\"datePublished\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-date\">\n\t\t\t\t\t\t\t\t\t\t<time>August 27, 2022<\/time>\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-5ac02e0 elementor-inline-item\">\n\t\t\t\t\t\t<a href=\"https:\/\/www.smartermarkets.media\/when-markets-break-episode-3-arjun-murti\/\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-custom\">\n\t\t\t\t\t\t\t\t\t\tEpisode Details \u2192\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/li>\n\t\t\t\t<\/ul>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6115381 elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"6115381\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-e85e782 elementor-widget elementor-widget-theme-post-content\" data-id=\"e85e782\" data-element_type=\"widget\" data-widget_type=\"theme-post-content.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"490\" class=\"elementor elementor-490\" data-elementor-post-type=\"post\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-049bbad elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"049bbad\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b924c55\" data-id=\"b924c55\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-17e375f elementor-widget elementor-widget-html\" data-id=\"17e375f\" data-element_type=\"widget\" data-widget_type=\"html.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<iframe title=\"When Markets Break Episode 3 | Arjun Murti, Former Head of Energy Equity Research, Goldman Sachs\" allowtransparency=\"true\" style=\"border: none; min-width: min(100%, 430px);\" scrolling=\"no\" data-name=\"pb-iframe-player\" src=\"https:\/\/www.podbean.com\/player-v2\/?from=embed&i=4itdm-12ab744-pb&share=1&download=1&fonts=Arial&skin=1&font-color=auto&rtl=0&logo_link=none&btn-skin=c73a3a&size=150\" width=\"100%\" height=\"150\"><\/iframe>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-b678dff episode-info elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"b678dff\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-08524cd\" data-id=\"08524cd\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-56e68fa elementor-widget elementor-widget-text-editor\" data-id=\"56e68fa\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>To close out our When Markets Break series, SmarterMarkets host David Greely sits down with Arjun Murti, the Former Head of Energy Equity Research at Goldman Sachs and the publisher of Super-Spiked on Substack. David and Arjun discuss the July 2008 spike in WTI crude oil prices to a record high of $147 a barrel and their subsequent collapse.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a341663 elementor-widget elementor-widget-text-editor\" data-id=\"a341663\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p><a href=\"http:\/\/smartermarkets.media\/wp-content\/uploads\/2022\/09\/SM84_ArjunMurti_TranscriptFinal_20220907.pdf\" target=\"_blank\" rel=\"noopener\">Download full transcript \u2192<\/a><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a1589ee elementor-widget-divider--view-line elementor-widget elementor-widget-divider\" data-id=\"a1589ee\" data-element_type=\"widget\" data-widget_type=\"divider.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-divider\">\n\t\t\t<span class=\"elementor-divider-separator\">\n\t\t\t\t\t\t<\/span>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-f11e4b0 elementor-widget elementor-widget-text-editor\" data-id=\"f11e4b0\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"bb-theme-elementor-wrap bb-elementor-custom-color\">\t\t\t\t<p>Hosted By<\/p>\t\t\t\t<\/div>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-fc2b55c elementor-widget elementor-widget-text-editor\" data-id=\"fc2b55c\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\tDavid Greely\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<span class=\"e-load-more-spinner\">\n\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-spinner\"><\/i>\t\t\t<\/span>\n\t\t\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"","protected":false},"author":1,"featured_media":277,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"pmpro_default_level":"","footnotes":""},"categories":[82],"tags":[],"class_list":["post-518","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-series","pmpro-has-access"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.8.1 - 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