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

To: Enigma who wrote (38253)	8/3/1999 4:45:00 PM
From: Exsrch	Read Replies (1) \| Respond to of 116976

D, Thanks for your note about this discussion. I am unfortunately at flight school in Florida (Flight Safety, where JFK Jr. learned how to fly) for the next several months so it will be difficult for me to be active on SI; however, I wanted to respond to this hedging discussion. Let me take a simpleton approach to hedging and the varied types of activities you can engage in: 1. You can sell gold contractually (gold you don't own) today at spot in hopes of buying it contractually tomorrow at a lower price and pocketing the difference. 2. You can buy gold contractually (gold you don't own) today at spot in hopes of selling it contractually tomorrow at a higher price and pocketing the difference. 3. You can borrow/lease gold from CBs (at a nominal interest) and physically (not contractually) sell the gold immediately at spot. Invest the proceeds (from selling gold at spot) and earn interest (cantango) till the borrowed/lease term is up and you return gold to CBs from new production. In the case of ABX, they engage in #3 and in essence they are earning an interest on the gold they have not yet produced. What gold they borrow/lease is sold and the cash from proceeds earn an interest (cantango) while the reserves act as collateral for the gold they will eventually return to the CBs. This is no different than how Walmart makes money. Walmart buys goods (borrows 60-90 net) from suppliers and sells (sometimes below the cost of production) the goods immediately (the speed of inventory turns are higher than AP) the cash generated is invested for X number of days (X days=number of days difference from the sale to when they pay suppliers) and they earn Cantango (which is not insignificant). Did Walmart destroy retailing in America? Yes maybe or No? Whatever the answer might be the end result is the consolidation of billions of dollars of retail sales going through Walmart which means they earn even more Cantango. Which I believe will be the most likely outcome with ABX also. Cheers, Exsrch

To: Enigma who wrote (38253)	8/3/1999 5:02:00 PM
From: Zardoz	Read Replies (2) \| Respond to of 116976

This is a "commodity swap", not a hedge. 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 WHY? because you have the producer selling in the future at a fixed price, reguardless of the RISK. There is not Keeping It Simple Stupid... Hedging: The primary economic function of futures markets is hedging-taking a futures position to offset risk of actually owning the physical commodity Lawrence G McMillan You proved why your above example is not a hedge. It doesn't offset risk. Hutch