You have indicated several times that forward sales is the method a commodity based producer can protect himself from price swings in the market. In most cases thi would be true, unfortunately when applying this principal to the gold market, it falls very short. The pog is now being determined by a coalition of speculators and bankers, who have a vested interest in keeping the price of gold from reaching its market driven equilibrium price. The reasons for the control have been discussed many times on this board and it is not necessary to rehash them.
The culpability of the producers in this scenario is simple and obvious. Attempting to guarantee themselves a certain price in a failing market they are selling gold forward. Unfortunately, when the gold is sold forward it becomes immediately available on the spot market with bullion supplied by the cb, thereby driving prices either lower or stopping a rally. The miners close out their positions with gold mined from their reserve base. For the past several years, this reserve gold has been commanding a much lower price than the original hedge. Todays's forward sales are priced below 300.00. The illfated scheme is backfiring on the miners with the speculators continuing to make a nice profit, and the bankers continuing to meet their agenda's with the cb gold.
This scenario exists in no other commodity based market. It is the failure of the producers to react in a way advantageous to them that is now the main cause of pessimism in the gold market. This depressing state is drying up the capital needed to flow into the market to reverse the situation and let gold reach its equilibrium price that would in all probability be in the 320 to 250.00 range. By closing marginal mines and replacing the lost production with gold purchased on the open market(supplied by the cb's) the producers would yield a substantial profit with little overhead other than transaction costs. There is not a listed company\ in the world that does not apply this principal other than gold producers. Each day articles appear, that companies close manufacturing facilities and purchase components for the products they sell on the open market at a lower price than they can produce them. Their overhead is reduced and their cash flow is enhanced by purchasing widgets in Indonesia. Double D, those Indonesian widgets are a metaphor for gold purchased from the central bankds and then sold to meet demand.
However, the speculators and the bankers are counting on the producers to fulfill their part of the control of the gold market, keep marginal mines open using the uneconomic gold to replace gold leased at a substantial profit to the speculators and the bankers.
It is astounding the producers do not get it, however, it is understandable considering their dig we must slogan. They would have been better served as children had they received a calculator as a Christmas gift rather than a shovel.
Ken |
