When a producer of a commodity sells forward, he is locking in a price today for delivery of the commodity sometime in the future.
At a price above the spot. This is a key point (1).
What is unique among the gold producers, a forward sale can be structured in a way that additional amounts of the commodity are available immediately at the spot market.
There are NO additional amounts of gold. You can't create additional amounts of gold from thin air. It either exists, or doesn't exist. If it didn't exist you'd expect a short squeeze on the sellers. But by forward selling you shift the amounts of gold from points of presumed low prices to points of perceived high prices. And with the added volatility {ahhh that key point 2} you achieve a much better price. Now, as mentioned before, there are companies that will speculate and sell excess amounts of calls. This is done under the idea that gold may fall and that they are unlikely to delivered. This is speculation on their part.
The increase in supply can and in the case of gold has had a depressing effect on the price of the metal.
Well there is no increase in supply... BUT Forward selling acts to smooth out the spikes of excessive demand. AND it also acts too smooth out excessive drops due to supply.
The hedging techniques employed by the gold producers contains considerably more risk than the hedging techniques used by the producers of most other commodities.
Not so. The risk of the hedge is depended on the amount of commodity as a percentage of production, and the ability to deliver. What the margins of the hedge are invested in is irrelevant to the hedge. So an oil producer is at just as much risk as a sugar producer, or gold. Only accidents, which effect production, are a concerned.
When factoring in the cost of the mine, the company can easily be relegated to the unenviable position of depleting their reserves at a low price that places the company at risk.
Really... look up to key points 1 & 2. If they aren't making money by hedging on a forward or future, and aren't doing it in times of high volatility; then they sure aren't going to be making a profit as the price drops lower. Lower then productions costs. YES, it is possible to miss some opportunity on the upside, but that is the risk of hedging.
Hedging: A secure income.
Now: explain how moving the sale price from the future to the present depresses the price when you {in the best interests of YOUR company and not gold speculator} receive a premium to the spot based on volatility and time.
Hutch |
