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

To: Albert V who wrote (3430)	11/22/1997 7:48:00 PM
From: Greg Ford	Read Replies (1) \| Respond to of 116841

CB's lend their gold to banks who in turn lend the gold to producers. The gold is sold into the open market. The producers have an agreement with the bank to repay the gold at an agreed upon date. During the period between when the gold is lent and the gold is repaid to the banks the producers earn contango - which is the difference between the LIBOR rate of interest and the leasing cost of gold. For example, gold which is sold forward today will have a forward value of say $365 per ounce in 5 years assuming a 4% contango. As the gold price goes lower it will be interesting to see if producers will continue to hedge at the levels they have been. The reasons relate to the ability to get credit - ie with the price of gold at 12 year lows trading banks will be looking carefully at the balance sheet strength of their counterparties. Secondly, with a significant number of producers having cash costs greater than $300 per ounce, will they be willing to enter into a contract that results in a gold price of $365 in 5 years. Some may not have a choice. Others may try to wait out the current low prices. Greg