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Gold/Mining/Energy : Gold Price Monitor

GDXJ 90.47

+0.5%

4:00 PM EST

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To: Ken Benes who wrote (38244)	8/3/1999 7:10:00 PM
From: Greg Ford	Read Replies (1) of 116752

In due course there will be mine closures. Hedging will merely delay the closures by will not stop them from occurring. Hedging, whether through forward sales or options is merely a risk management tool used by producers. Gold is borrowed from the CB's and sold in the market. The proceeds are invested in interest yielding instruments and a lease rate is paid to the CB via a bullion bank. The producer will likely close out the trade by buying gold and offsetting it against the trade. On a net basis hedging does not bring additional gold to the market. It may result in gold coming on the market more quickly or in an uneven fashion particularly is there is an increase in hedging in a given period. As long as the quantum of hedging remains the same hedging does not have an impact on the market wrt overall supply. The problem is that many producers have increased or are increasing their hedge books. This one time increase will affect the market when it can least handle the influx of more gold. Expect Newmont, Homestake, Kinross and Battle Mountain to increase their hedge books. Expect ABX, PDG, Anglo and the Aussies to continue to hedge aggressively. An interesting stat is to look at is the in-the-money portion of hedge books. The information below is from Scotia Mocatta using the 1st quarter of 1999 when gold was at $280. It disclosed how much each ounce hedged by the producers below is in the money. As you can see some producers could have a negative mark to market if gold rallies above $300. Other producers such as Barrick and Placer Dome would be less affected. What needs to happen is that the in the money number needs to decrease so that when there is a rally producers will cover their hedge books. The number could decrease as in-the-money hedges are replaced with new hedges at low prices. Market to market per ounce hedged Ashanti 25 Barrick 60 Bema 35 Cambior 80 Dayton 54 Echo Bay 18 Eldorado 23 Hecla 73 Kinross 23 Mcwattters 7 Placer Dome 104 Richmont 10 Viceroy 89 At the end of the day production will be cut back as old hedges are replaced with new hedges with gold prices at 20 year lows. Greg

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