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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: abuelita who wrote (52131)	5/27/2002 11:13:40 PM
From: Jim Willie CB	Read Replies (2) \| Respond to of 65232

yes right, no stupid questions... on hedging by miners gold and silver mining companies sell future production they do so often in the form of futures contracts such contracts are heavily leveraged as gold price descended steadily over the years, such practice resulted in very large profits to the miners they essentially profited on their hedge books (really gamble side bets) as they proceeded with mining production where it got dicey and corrupt is by selling their next few years of production in the case of Barrick, they sold 4.5 yrs production into the future imagine it being 1996, where gold is 380 the sold 1998 production was sold for 380/oz, but sold in 1996 by the time 1998 rolled around, gold had fallen to 355/oz I am guessing at prices, so bear with me on the example a near 10% down move on shorted futures could profit quite a huge sum of money the farther they sold out, the more they sold, the more money they made the sad part is that mining companies engaging in such practice actually help to kill off smaller producers they turn out killing their own industry slowly they accelerate the down movement of gold prices but heding is not the guts of a mining business it is really a small LasVegas division skunkwork division stuff like that done wrong can kill a company now gold is rising in price and forward sales with delivery dates only months away can be satisfied with actual gold output from production but forward sales with delivery dates still a couple years away are not deliverable yet by the time the date arises, gold may have risen much more therein lies the "big bet" that is not central to mining they are betting their entire financial balance sheets the hedging is really forward selling it works very well in amplifying profits during downtrends it destroys companies when gold rises in price a typical forward contract might be for delivery in 2004 at $280/oz and might be for a great many tons of gold it gold is selling at $500/oz, imagine the loss so they attempt to unwind such stupid gambling forward contracts the ultimate irony is that such gold mining firms become buyers of gold contracts on the world futures exchanges they scramble to buy back their "gone wrong" contracts their hedge books become acid to their balance sheets I hope this helps it is not as complicated as it might seem / jim