Gold Is Worth More in New York

I think a lot about what I sometimes call “abstract commodity space.” Sometimes you want to buy nickel or aluminum or coffee or cocoa to make batteries or beer cans or cappuccino or chocolate bars, so you go to some supplier and negotiate a contract for the delivery of a useful amount of a particular grade of the commodity to your factory. Sometimes, though, you want to bet on the price of nickel or aluminum or coffee or cocoa, to hedge some risk to your business or just as a speculative bet. So you buy commodity futures, financial assets that reflect the price of a commodity but don’t require you to store it or worry about it spoiling.

The way these futures often work is that there are big warehouses full of the commodity, and people write futures contracts that essentially transfer the entitlements to the commodities in the warehouse, without ever having to take them out. Your futures represent a claim on some nickel or coffee in a warehouse in abstract commodity space,1 and you don’t have to think much about the physical properties of the actual thing. The warehouse system has put a layer of abstraction on the messy commodity business, and you can treat the commodity as just a number on your computer screen.