Several aspects need to be examined. First buying calls isn't a free transaction. How much did they pay for a 2001 call, 335 strike price: $15?, $25?. Second, buying these derivatives (such as a two year out call) is not risk free. What happens if the credit quality of the other side slumps, or worse locks out? In fact who is the other side of the trade, Goldman Sachs, JP Morgan? How do you really know if everything is so perfectly matched? These black boxes predict likely outcomes, NOT ALL OUTCOMES.
Maybe I'm brain dead, but selling a forward contract gold at $360 (already reflects the intango, or built in interest rate), then turning around and buying an equal amount of calls @ 335 (plus say $20) strikes me as an odd strategy. From a price point of view it is a covered, slightly out of the money call write. Could it be that ABX couldn't buy back their forward sales even if they wanted too, so their "bankers" made up another paper derivative (335 calls)to buy it back "on paper"?
From a credit point of view it also reflects enormous confidence in the derivatives markets to be around to deliver under duress. There have been problems with that already such as in Japan's TOCOM markets. What's the point of the transaction? If it walks like a bank, talks like a bank, and acts like a bank, it probably is a bank. I don't want a bank, I want a mining company. I'll wager that per se many, if not most gold investors have that same fear of financial institutions sentiment. That's a reason we buy gold in the first place. ABX (and others) needs to figure that out. |
