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

To: Zardoz who wrote (44423)	11/1/1999 1:47:00 PM
From: tyc:>	Read Replies (2) \| Respond to of 116762

I surmise; A gold miner wishes to protect a portion of its future earnings against declining prices, so it approaches a bullion bank. The bullion bank contracts to buy its future production at a price well above the spot price, and charges the miner only the gold lease rate of about 2%. No conspiracy here ! But what comes next ? Having secured its future supply AND the cost of leasing, the bullion bank now borrows that gold from the central bank and sells it on the spot market for greenbacks. It is then able to use those greenbacks to earn an economic return. Some of the gold is bought for consumption by the jewellery trade but a significant portion is bought by "Saudi princes". If the Saudi princes wish to make a return on their investment they will lend it back to the bullion banks at the same gold lease rate. The bullion bank is now free to sell this gold again providing it can make another futures contract with a mining company to pay the rent and ensure supply. You can see the multiplier effect here. And you can see how this short selling would easily satisfy any increase in marginal demand that otherwise would have resulted in higher prices. Following the jump in gold prices recently, Ronald C Camber, the president of Newmont Mining said (as reported on Yahoo): "We are pleased with the market's reaction following the announcement by the European Central banks. It confirms our belief that gold's supply/demand fundamentals would support a higher gold price once the opportunity for unprecedented speculative short seling was removed." If my surmise is correct, surely it was the mining company's hedge that provided the opportunity for short selling. The irony of the situation is this; the price that our mining company contracted for doesn't even cover the FULL cost of production. An officer of Placer Dome at Denver said.. " If you consider the full cost of producing gold including the cost of exploration, the current price of gold is far from adequate.... I think a figure that begins with a "4" would be more appropriate." What kind of hedge affords protection by capping revenue at a price below cost and in so doing guarantees continuing low prices by permitting "unprecedented speculative short selling "? The only hope for increased price of gold lies in the possibility that mining companies will realise that forward selling is not in their best interests, and start to buy back their hedges. This will force prudent bullion banks to BUY gold on the spot market, for who would want to be short naked in that situation ? Gold would very quickly find its true higher value. Recently someone said that selling covered calls is a bear market strategy. No!! If you buy a covered call position in a bear market you will lose money; just a little bit less than if you hold the stock unhedged. You buy a covered call position believing and hoping that the price will go UP; that the stock will be called away and that you will make a reasonable profit. Downside protection is minimal. So it is when a mining company sells futures on a small part of its production. Nothing would please them more for the price (of gold) to go up; some modicum of downside protection is afforded, but only to the (small) proportion of their production covered by the futures sale. Clearly Barrick does not need this protection; it is seeking only to maximise profits. But if my surmise is correct, profits would be maximised if the hedges were CLOSED, for the price of gold would rise to the benefit of 100% of production. Someone has to accept the risk of falling gold prices. The risk belongs to the mining companies and their shareholders. I am sure that the shareholders would willingly accept that risk. What they will not accept is this continued uncertainty about what is going on.

To: Zardoz who wrote (44423)	11/1/1999 1:48:00 PM
From: Richnorth	Respond to of 116762

As I said before, "never, never swallow everything hook-line-and-sinker." Remember, both Cambior and Ashanti initially declared everything was hunky-dory for them and yet about a week or so later, the world learnt they were in deep-shit trouble! One can never know whether Barrick is pulling wool over our eyes. Ah, but then Barrick may be an unusual exception?

To: Zardoz who wrote (44423)	11/1/1999 7:43:00 PM
From: Mark Bartlett	Read Replies (1) \| Respond to of 116762

Hutch, I was expecting something a little more than a rehash of Barrick's Q3 report from September 30. Mr. Chen has provided, what appears to me, to be a very cogent explanation of what Ted Arnold likely meant, when he suggested that forward sales, were in fact short sales in disguise. Seems to me that as long as the right contractual arrangements can be made, this forward sold gold can be recycled several times. In addition, since Barrick has one of the lowest costs of production going - then is it really to their benefit to hedge any production???? ... if they go under, 99% of the others will have already gone bye-bye. Sure it may slightly enhance their bottom line for certain reporting periods, but in the long haul it looks overall detrimental - not only for Barrick, but for many others as well. Best to you, Hutch. MB

To: Zardoz who wrote (44423)	11/2/1999 5:48:00 AM
From: tyc:>	Read Replies (1) \| Respond to of 116762

A forward sale IS a short in the spot market You said "First off. Barrick is not short 14 MTOz, it is sold forward; call this a propagated Ted Butler fallacy." It seems to me that your statement begs the question. When a mining company makes a forward sales, its banker short- sells the gold on the spot market delivering gold leased from the central banks. The forward sale price is nothing more than the proceeds of the short sale plus interest to the date of the forward sale minus the gold lease rate. The only reason this has been profitable is that the price of gold has declined; OF COURSE a short sale is profitable if the price of the commodity declines. But perhaps the price declned BECAUSE of the short selling. The proceeds of the short sale were placed on deposit at the bank to earn interest until the date of the forward sale. To close the hedge all that is necessary is to take those funds and buy gold on the spot market with it, returning the gold to the central bank. In other words just be satisfied with the profits that the original short sale has already produced (by driving down the price of gold).