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

To: Little Joe who wrote (27329)	1/30/1999 1:14:00 AM
From: mick	Read Replies (1) \| Respond to of 116763

Hedging and the Price of Gold Joe, I am not really an expert in this area. I have therefore taken hilites from Peter Munks introduction in the annual report. Cash flows in 1997 increased to $470 million from $463 million, as operating costs dropped from $193 to $182 per ounce and we were able to realize gold prices of $420 per ounce, compared to the year's spot price average of $332. The $88 premium we earned came as a result of our hedging program, widely acknowledged as the best and the most extensive in the industry, a critical factor in Barrick's past and future success. Our hedging program produced more than $200 million in earnings in 1997. Over the past 10 years it has consistently allowed us to realize prices higher than spot, yielding an average $46 per ounce premium, for an additional $580 million in net earnings. We pioneered the use of hedging in the gold industry as a consistent means to enhance the revenue from ounces of gold produced. Hedging for this purpose is often not fully understood. It is much more than forward selling. Here are some of the reasons why: With 10 million ounces hedged at $400 per ounce, we have a $4-billion position on which Barrick earns interest. We actively manage this fiscal asset to maximize the yield we derive from it. Most importantly, hedging will continue to provide significant financial benefits in a lower or higher gold price environment. The interest on our hedge position coupled with low-cost production produces very profitable ounces today each Barrick ounce is four times as profitable as those of our peer group. With the unique flexibility of our hedge contracts, Barrick can take full advantage of peaks in the gold price. We can at any time deliver into the spot market and roll forward our contracts and earn additional interest. It has often been claimed that our hedging policies have hurt the gold price. I feel the opposite is true. Because we deliver our production against our future contracts, we can be discriminating as to the timing of each new sale to ensure that it does not hurt prices. Most of the futures contracts do sell for a bit more since the assumption is scarcity or inflation will increase the value of the commodity. I haven't seen a future contract for gold that is $88 more than the current spot price. To me, it means they are pre-selling gold in the ground at a premium and keeping it in trust. I didn't suggest that this is a private market. I was suggesting that the spot market is a poor representation for the value of a commodity. For example, no one pays close to spot for natural gas. There is always a premium for an assured contract. The spot market is generally used by utilities that can swing between natural gas or some other fuel. Its useful as a representation of the current cost. Anyway, I'm going to bed. Thinking makes my head hurt. Buy gold. Its price is going up anyway. Cheers