Interesting discription of forward sales........
Forward Selling - By Gold Producers
For most of the past decade, Gold mining companies gradually changed the way they market
their Gold. To an ever-increasing extent, they have "forward sold". The mechanism is quite
simple. A Gold mining company with proven reserves in the ground wants to sell a portion of
these reserves forward. The company representative goes to a bullion dealer who agrees to pay
him, for example, $500 per ounce for Gold to be delivered two years from now. The Gold
company has locked in a profit, and on top of that, has the money now for Gold which is still in
the ground.
The Gold bullion dealer is exposed, however. He is exposed to a possible loss if the Gold price
falls in the future. So, to hedge this position, the bullion dealer sells Gold - for immediate
delivery. Wait a minute ( you cry ) , where is the bullion dealer to get the Gold to provide for
immediate delivery? The answer brings us directly to the second part of the mechanism for
maintaining the $US 400 Gold "glass ceiling".
Gold "Leasing" - The Central Banks' Contribution
Our intrepid bullion dealer goes out and "borrows" the Gold. Where does he borrow it from?
That's easy. From the formidable 36,000 Tonne hoard still owned by the world's Central Banks.
To get the Gold - or more accurately, to get a marketable claim to the Gold - our bullion dealer
pays what is known as the Gold lease rate ( up until recently, an extremely low rate of interest ) .
He then sells the Gold - or the claims to Gold, and invests the money. This is the way the
difference between the spot and forward prices for Gold is determined. The forward price is
the money interest rate which our bullion dealer receives for his investment minus the lease rate
which he paid to borrow the Gold.
The point is that this entire fandango ( that's "fandango" - not "contango" ) can be performed by
lending physical Gold, or it can be performed by lending a paper claim to Gold. The miners'
Gold is still in the ground. The Central Bank sometimes lends Gold, or it lends a claim to Gold.
These are what our bullion dealer sells. And since most demand for Gold is not a demand for
the physical metal but a demand for paper ( forward, future, etc ) claims to the metal, this
mechanism can meet the demand without an undue strain upon the available supply of the
physical metal, and the upward pressure on the price of Gold that would cause. |
