I am indebted to Dr, Fraser Murrell, a follower of the mechanics of the gold market from Australia, for the following piece of theorising. Dr Murrell has a Ph.D. in maths and well understands option pricing. He is now working on what the "physical premium" attached to the COMEX price should be, given expectations on the probability and date of a COMEX cash settlement but would be interested in contributions from other like-minded gold theoreticians in this work.
I am not certain I agree with his hypothesis but it is certainly not outside the bounds of possibility given the huge volumes of paper gold traded on the COMEX. This certainly currently acts as a price control mechanism on the physical metal, so what happens if such control is removed?
Dr. Murrell’s hypothesis is set out virtually in full below, and no doubt will be of strong interest to academics and others who are involved in researching the mechanics of gold pricing - and of other metals too where the futures markets are instrumental in defining ultimate pricing.
To read his argument and the rest of this article, click here.