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Gold/Mining/Energy : Barrick Gold (ABX)
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To: Enigma who wrote (3496)10/14/2005 10:38:59 AM
From: tyc:>   of 3558
 
Not sophisticated, just too simplistic perhaps.

The gold in the ground has been sold ("exchanged") for US treasuries but it remains to be mined, (which is tantamount to saying that the UStreasuries remain to be mined ). What happens if mining costs balloon so that they exceed the value of the bonds ? (commonly called inflation)

I recall that early this year ABX was among the few gold miners to declare a profit. However, they did so by ignoring their hedges and selling their entire production at spot prices. If some of their production had been sold at the lower hedge prices the quarter would have been unprofitable, I presume. Production sold at lower hedge prices can only cause a loss if it is unprofitable.

Anyway, the point I was trying to make is how much more profitable it would have been to incur US$ debt, to be repaid from gold production at today's higher prices. Far better to be short the US$, (i.e. be in debt), than to be short gold and long US$ which is what ABX hedges are. (With knowledge of hindsight, of course)
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