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

To: Rob Hinton who wrote (43957)	10/26/1999 6:05:00 PM
From: tyc:>	Respond to of 116759

A neophyte answers a neophyte. Your are Right ! If Newmont is short calls at $300 that simply means Newmont has the obligation to supply gold at $300 per oz. That's hardly a loss when their cost of production is less than $200. The problem is simply an accounting problem... US law requires them to mark the value of their hedge to the market. That means that if the price of gold goes up the value of their short calls goes up, and they must show this as a loss ON THEIR BOOKS, until such time as the hedge is closed. Of course, if the price of gold goes down the converse applies and they would show a profit. There could be another problem as well but I dont think this is of concern to Newmont; as the price of gold approaches the strike price, the amount of cash that they must put up (margin) increases; when the call is "in the money" this margin increases dollar for dollar with the price ( I believe). As we see in the case of Ashanti, the margin requirement can quickly get out of hand.

To: Rob Hinton who wrote (43957)	10/26/1999 6:26:00 PM
From: Casaubon	Read Replies (1) \| Respond to of 116759

Well, in the example you stated, you have a described a covered call. With covered calls, you already own the stock, thus it is very simple for you to transfer ownership of the stock, if it is called away. However, the hedgers in the gold mining industry (the mining companies), have hedged against future production, not really against gold they have stored in vaults (which would be easy to deliver). So, if there is a short squeeze caused by those who are long calls, and those longs presumably want to take delivery of the physical metal, there just isn't enough metal to be delivered. Depending on how short the supply of metal will determine how many years of foward production need be mined to deliver. The problem is exasperated by the the CB's declaring a moratorium on sales.