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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Zardoz who wrote (38245)	8/3/1999 2:30:00 PM
From: Enigma	Read Replies (1) \| Respond to of 116753

Hutch - this is the simple math of a hedge (all prices are fictional, and months may not be correct): Spot price is $255 - producer sells 100,000 oz forward for delivery say in September 2001 @ $285. Spot price in September 2001 = $345. Producer Buys (i.e. closes) Sept.2001 contract for a loss of $345 - $285 = $60/0z X 100,000 0z = $6,000,000 loss Producer sells 100,000 0z into spot market for $345/0z therefore proceeds = $34,500,000 Deduct loss on forward sale of $60,000 therefore net proceeds of sale = $34,500,000 - $6,000,000 = $28,500,000. In other words the producer, by selling forward has secured his price of $285/oz = $28,500,000 divided by 100,000 -------------------------------------------------- Lets say the price in September 2001 has fallen to $245/oz. Producer covers forward sale for a profit of $40/oz = $285-$245 = 100,000 X $40 = $4,000,000 Producer sells 100,000 oz into spot market at $245. Proceeds = $24,500,000. Total proceeds = $24,500,000 + $4,000,000 = $28,500,000 = $285/0z Same result. -------------------------------------------------------- The producer borrows 100,000 oz from a bullion bank as collateral for the forward sale - so no additional margin is required. ------------------------------------------------------------------- In practice different companies will employ different timing strategies. I would think that Barrick sells regularily into the spot market and places forward sales contracts regularily and covers them regularily - without any reference to the price at the time. The gold loans may be rolled over or repaid.. ----------------------------------------------------------------- But in essence the principal is the same as the one used by the farmer in Kansas who sells his corn forward after planting, covers his contract at harvest time (or sooner), at a profit or loss, and sells his corn into the spot market when he is ready. He therefore secures his price at the hedged price. __________________________________________________________________ BTW hedging ALWAYS includes a sale into the spot market. d