1000 oz of Ag - what to do?

[c1ue]

I've got a block of 1000 troy oz of silver.

I bought this for about $4500, and have been using it as a (very heavy) paperweight. Since I did not anticipate a price change in the near term, I had the company ship it to me rather than pay storage costs for many years.

However, now that prices are going up, I am investigating the means of selling it.

The original company I bought from is long gone, in fact there have been a number of successors which have also been absorbed.

Any suggestions - other than a jeweller/pawn shop?

[Spartacus]

Kitco.com

I believe you open an account with Kitco, lock in a price and send the bar.

Whether the price rises or falls while the bar's in transit - whether you ship to them or they to you, you pay or are paid the agreed-upon price.

I don't know what they charge for assaying.


or ebay.


I've got a block of 1000 troy oz of silver.

I bought this for about $4500, and have been using it as a (very heavy) paperweight. Since I did not anticipate a price change in the near term, I had the company ship it to me rather than pay storage costs for many years.

However, now that prices are going up, I am investigating the means of selling it.

The original company I bought from is long gone, in fact there have been a number of successors which have also been absorbed.

Any suggestions - other than a jeweller/pawn shop?

[grapejelly]

Apmex.com is better than Kitco. I would try them. Of course, I'd keep it but that's just me. I like real tangible assets.

[DemonD]

a 62.5 pound paper weight? :confused:

maybe you can trade it for gold.

[c1ue]

Thanks for the advice folks.

As for trading it for gold - I won't touch gold so long as the monster overhangs of Barrick Gold derivatives exist (and other mining companies).

http://www.cbc.ca/money/story/2007/05/02/barrick.html?ref=rss

These big honking under water puts are significantly distorting the market - and the fact that gold producers own them means the distortion could affect new supply as well.

Note that the Barrick gold loss only represents probably 1/2 of their outstanding derivative obligations, and it is not clear to me that it is the worse or better half.

Too many variables for me.

[c1ue]

By the way, for a while (when I was still near my parent's home where the bar was stored) I was using it for a situp weight :D

[Andreuccio]

In reading the article, I didn't see the negative you did. I know next to nothing about mining gold, but it makes sense that they would have these hedging contracts to protect themselves from price fluctuations. Doesn't buying them back show that they believe gold will rise, or at least be selling for a price higher than the contract price when it comes due? Also, according to the article, Barrick can now "sell all of its gold ... at spot prices." Where did you get the information about it being only half? What did I miss?

[Andreuccio]

There is a list of Precious Metals dealers available online from the US Treasury at

http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=Lookup

They're all companies that sell American Eagle and Buffalo Gold coins, but most, if not all, probably deal in silver as well. While the Treasury doesn't endorse any of these dealers, I believe the fact that they're on the list makes it much less likely they engage in scams or fraud, since reports of that would probably get them taken off the list quickly. (Although these days I suppose its possible being on the list just shows a high level of donations to the Bush 2004 Re-election Campaign.)

The list is set up by state, so you might be able to find somebody local that you could deliver to personally.

You can also use the list in reverse. That is, find some dealers online that seem to have good prices, reasonable charges and policies, etc., and then access the list for whatever state they're in to see if they're on it.

[Eurofan]

In reading the article, I didn't see the negative you did.

I'm curious too. C1ue could you elaborate when you get an opportunity? I took the linked article to be a positive indicator for gold prices in the medium-long term.

[zoog]

I'm late to this party, but I finally read this article (http://www.zealllc.com/2007/goldcot2.htm) on Zeal today (published 5/25) that made some sense of gold futures and hedging by gold miners.

Long article, here are a couple relevant quotes:

The first thing that is crucial to understand is, unlike stocks, futures are a zero-sum game. This means that every dollar won in a gold futures trade is a direct dollar loss for the counterparty on the other side of the trade. In this type of trading, every long contract is perfectly offset by an opposing short contract. Thus the total number of longs and shorts at any given time is always equal, in perfect equilibrium.Gold companies that borrow money to build mines usually have to hedge some fraction of future production as part of their debt covenants. Now they are obviously bullish since they are building a gold mine, yet they still have to effectively short some gold in order to finance the mine.

[c1ue]

Andreuccio, Eurofan,

Sorry for the slow response - I am in Russia on business and it is going exactly as slow as expected.

Fortunately every cloud has a silver lining - I sincerely hope all the hoops I'm jumping through - and I include the 'wink wink' business factor - will be bear traps for my future competitors!

Anyway, as to why I do not dare touch gold with a mountain of existing under-water derivatives held by Barrick Gold and others:

1) The amount of gold involved is greater (for Barrick and for 1 other certainly) than the yearly amount of gold mined by the respective companies. Thus it is not a case of making less money, but rather that these chumps CANNOT escape their bad bets without forking over big cash.

2) In the process of riding out this loss-making derivative storm, any means needed to reduce losses will be employed. This is not a case where the losing player is so small that affecting the market is difficult without other players possibly getting a free ride - rather - it would be stupid not to employ more money to reduce losses given that the derivatives position is a significant chunk of the market.

Thus I fully expect a 9 digit war chest per company available for machinations, plus potential playing with production to also influence the market.

As for where I get my information: keep in mind Barrick acquired Placer Dome.

This was completed at the end of 2006Q1.

Between Barrick and Placer, they combined for something like 21M Au.Oz of put derivatives.

Barrick themselves say they have disposed of 9M Au.Oz puts in 2006, plus another 2M Au.Oz puts in 2007Q1 (hence the $500M derivative loss and $159M overall loss).

Unless something funny has happened, that tells me there are somewhere around 10M Au.Oz still contracted out. Placer produces some 8M Au.Oz a year, so likely they will finish out the year by just eating the loss with production, but note that this will kill their bottom line.

This is no longer a loss, but rather a lack of gain, but note that Barrick is not the only entity with such positions.

I have zero desire in putting my money into a commodity where some entities with large war chests may try a market maneuver to reduce their losses.

[c1ue]

Another shoe falling: Newmont exits its gold hedges

http://media.corporate-ir.net/media_files/IROL/66/66018/7_05_07_Newmont_Eliminates_Gold_Hedges.pdf

A possible reason why gold was treading water/down slightly in the past month.

2nd shoe has dropped - there are many more to go.

There are probably around 30 Moz Au of hedges still left with AngloGold being the largest and Barrick's new mine finance hedge being similar size.

Hence my extreme caution w/ regards to gold as an investment.

Top 10 gold producers? For 2003:

Barrick+Placer (9.37 Moz Au)
Newmont (7.38)
AngloGold (5.63)
Gold Fields (4.2)
Harmony (3.33)
Rio Tinto (2.73)
Freeport (2.46)
Kinross (1.65)
Buenaventura (1.53)

http://www.mbendi.co.za/indy/ming/gold/p0005.htm

[Lukester]

Re: 1000 oz of Ag - w

What to do? - Hang onto it and quit worrying. It will likely be your best performing asset in a decade. Concerns as to whether it's in fractional or large denominations are overblown. Even after silver corrects back down 100% or 200% from it's high in a decade, it will still be several hundred percent higher than it is today.

If you plant it in your back yard probably even the worms will steer clear of it as bacteria really don't like the stuff.

Here's Marc Faber on the imperative for hyperinflation - what the heck should you worry about with a large bar of silver you plan to hold for a decade? Micro-managing or micro-analysing PM investments will lead you to get "squirrelly" and dump them when you really should be forgetting that you even own them (the ideal investment, BTW) for a decade!

_________________


WHAT MARC FABER, SWISS ECONOMIST, THINKS ABOUT INFLATION (US INFLATION) --- (I-TULIPERS OF COURSE YAWN, BUT IT'S INFORMATIVE TO THE PUBLIC)

Subject: FABER ON HYPERINFLATION 2006

US MZM (widest measure of the annual monetary supply) has soared as a percentage of GDP in recent years and, as in the case of Japan, has created a huge monetary overhang. And while monetary conditions have tightened relatively in both Japan and the US, because money supply is no longer expanding as a percentage of GDP, looking at credit growth there can be no question that monetary polices are still expansionary. I am grateful to Kurt Richebächer for having recently pointed out that, in the US, in the fourth quarter of 2005, non-financial credit expanded at a new annual record rate of US$2,445.7 billion.

According to Richebächer, this compares with US$1,710.5 billion in the second quarter of 2004, at the end of which the Fed started its rate hikes. Financial credit increased US$1,224.4 billion, as against US$932.7 billion in the second quarter of 2004. In aggregate, overall financial and non-financial credit growth accelerated over this period of rate hikes from US$2,643.2 billion in the second quarter of 2004 to US$3,670.1 billion in the fourth quarter of 2005. In percentage terms, borrowing and lending increased a staggering 38.9%.

According to Richebächer (former chief economist of Dresdner Bank), “the fact to see is that all the rate hikes were undertaken in [the] complete absence of any monetary tightening. Plainly, the Fed has readily provided any bank reserves that the financial system has needed to maintain its credit expansion. It is a farce of monetary tightening. For all of 2005, total credit expanded by $3,340 trillion, to $40,230 trillion, up more than $500 billion from 2004’s record $2,818 trillion increase. For comparison, annual total credit growth averaged $1,237 trillion during the 1990s. Trying to capture the dynamics, we compare the credit expansion with the simultaneous increase in real and nominal GDP. Well, in real terms, it was up $378.9 billion in 2005, and in current dollars, 751.4 billion.”

So, in order to generate nominal GDP growth of US$751 billion, in 2005, total credit market debt had to increase by US$3,340 trillion — 4.4 times faster than GDP. Now, as is the case for the current account deficit, which hovers around 7% of GDP at present, the optimists will say that debt growth that is four times larger than GDP growth is sustainable. This may be the case for now, but the point is that, in the 1950s and 1960s, debt and GDP grew at about the same rate, with the result that in 1980, when Paul Volcker (former head of US Federal Reserve Bank) tightened meaningfully (raised interest rates to 20% to squeeze out inflation), total credit market debt was “only” about 130% of GDP.

Then, in the 1980s, debt grew at about two-and-a-half times GDP, in the 1990s at about three times GDP, and now at more than four times GDP. In other words, as GaveKal Research pointed out, in order to sustain the economic expansion, debt growth will have to accelerate soon to initially five times GDP, later to six times, and if we extrapolate the trend that has prevailed since the 1960s, eventually to more than 20 times GDP.

Similarly, the current account deficit, which grew from 2% of GDP in 1998 to around 7% of GDP, would have to triple to around 20% of GDP in the next five to seven years in order to sustain the growth rates in foreign official dollar reserves (global liquidity) and economic growth around the world, if the recent trend is extrapolated. Also not forgotten is the US saving rate, which declined from an average of 9% in the 1970s to less than zero at present and turbo- charged the economy. If the stimulative economic impact of a declining saving rate is to be maintained, the saving rate will eventually have to be at around –10%.

Now, you don’t need to be an economist with a Harvard education to see that these trends are not sustainable in the long run. However, it is my belief that the Fed, and other central banks which are at least as agile at printing money as the Fed is, will try to postpone the hour of truth by a renewed massive liquidity injection when the next recession arrives. So, my concern remains the same: before the final debt crisis hits, we might see very high rates of inflation — most likely hyperinflation, with all asset and consumer prices soaring (amidst falling real incomes).

Until next time,

Marc Faber

_________________


About Marc Faber > Biography

Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.

Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong.

Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager.


_________________



GLOBAL CENTRAL BANK MONEY PRINTING - RAW DATA (Published monthly in back pages of the Economist magazine)

PANDORA'S BOX HAS BEEN OPENED
CountryMoney Supply
% Change on
Year Ago (Broad)
Australia +11.2 Sep Britain +14.2 Oct Canada + 8.6 Oct Denmark + 9.1 Oct Japan + 0.7 Oct Sweden +10.6 Oct Switzerland + 2.4 Oct United States + 4.8 Oct Euro Area + 8.5 OctSource: The Economist, Dec. 2, 2006

As the table on the left illustrates, broad money supply growth around the globe is running at high single digits or in some countries at double digits.

Shown in this table and the graph below, central banks around the globe continue to churn out the oceans of money that fuel the global financial system.

[c1ue]

Even after silver corrects back down 100% or 200% from it's high in a decade, it will still be several hundred percent higher than it is today.


L,

Unfortunately I have to disagree.

You forget that I bought this at $4.50/oz Ag in 1997; my mother is sitting on 5000 oz/Ag bought in 1983.

Even with today's elevated price, my return on my investment thus far is a shade under 9.9% - with almost all of it coming in the last year. My mother on the other hand is not nearly doing as well.

While I do agree there is a possibility of Ag hitting $20/oz, on the other hand I like to lock in profits.

Even Warren Buffett sold his silver after a couple of years.

I don't know about you, but my personal risk/reward assessment for my existing investment is saying to sell.

[grapejelly]

L,

Unfortunately I have to disagree.

You forget that I bought this at $4.50/oz Ag in 1997; my mother is sitting on 5000 oz/Ag bought in 1983.

Even with today's elevated price, my return on my investment thus far is a shade under 9.9% - with almost all of it coming in the last year. My mother on the other hand is not nearly doing as well.

While I do agree there is a possibility of Ag hitting $20/oz, on the other hand I like to lock in profits.

Even Warren Buffett sold his silver after a couple of years.

I don't know about you, but my personal risk/reward assessment for my existing investment is saying to sell.

You have to do what you think best obviously.

I would suggest that you look at it differently. How much of your assets are tied up in paper and how much of them are in physical media you can hold in your hand (if you are strong)?

I like to diversify out of paper.

[Lukester]

Hi C1ue,

Are you writing to us from a hotel room in Moscow? Sounds exotic. What's to do in Moscow in the evenings for a quiet American? Wish I was there instead of San Diego ...

How much you do want for the bar? Just kidding. Actually I would buy, but I can't. I just divested myself of 15K pasty faced paper b0nars precisely for some Ag. when it dipped down to $12.50. What a steal!

I'd give it another year if I were you before selling. You've got maybe 25% downside, vs. 300% upside if the upside thesis is correct. How much will you lose to find out?

Cheers.

[c1ue]

Grape,

My strategy for diversification is to go offshore.

As I have relatives in Russia, I have opened 1 company and am investigating 2 more business opportunities. (as a foreign national, I cannot be managing director of a Russian company - and I'm not giving control of any business to anyone I cannot absolutely trust)

I like Russia for several reasons:

1) short term energy-based foundation for the Russian economy - as well as other commodities like aluminum, diamonds, platinum, etc.

2) Russia is still in its growth phase - and this is unlikely to be cut short by lack of credit due to 1)

3) Interest rates for ruble deposits are 9% (at Citibank Russia) and 10% for deposits over 650000 rubles (about $25K)

4) A typical 2 bedroom apartment in an existing suburb of St. Petersburg, within bus ride of a subway station, costs around 75K (probably higher by the time I post this :p)

5) The ruble is undervalued by many views - including the Big Mac Index :rolleyes:

This covers the stability part.

As for appreciation - creating a successful new business is by far the best use of money if you can do it.

Investing is only good for passive growth if you have another and better means of getting income (i.e. employed)

[c1ue]

Hi C1ue,

Are you writing to us from a hotel room in Moscow? Sounds exotic. What's to do in Moscow in the evenings for a quiet American? Wish I was there instead of San Diego ...

How much you do want for the bar? Just kidding. Actually I would buy, but I can't. I just divested myself of 15K pasty faced paper b0nars precisely for some Ag. when it dipped down to $12.50. What a steal!

I'd give it another year if I were you before selling. You've got maybe 25% downside, vs. 300% upside if the upside thesis is correct. How much will you lose to find out?

Cheers.

Nope, I am back from my 6 weeks in Russia. I'm considering going again, but probably not until mid August or September as the ticket prices over summer are ridiculous.

As for what to do - I spend most of my time in St. Petersburg, not Moscow. St. Petersburg has 3 world class theaters, 10 more in the scale of a San Francisco Opera house, and innumerable small venues. Each theater changes to a new opera, concert, or ballet every 1 or 2 days.

So, if you like the performing arts, you cannot lack for something to enjoy.

In addition, St. Petersburg has the Hermitage - the largest collection of Western art anywhere - including the Louvre. Of course, some of those items are 'disputed' :o

Then there is the architecture. Literally hundreds of former palaces - a number with the original contents. The Amber Room (reconstructed). Catherine palace. Yousupov palace (where Rasputin's murder took place). Petergof (Peter's suburb palace). etc etc.

Then if you're not married like I am - there are the girls :cool:

[Finster]

L,

Unfortunately I have to disagree.

You forget that I bought this at $4.50/oz Ag in 1997; my mother is sitting on 5000 oz/Ag bought in 1983.

Even with today's elevated price, my return on my investment thus far is a shade under 9.9% - with almost all of it coming in the last year. My mother on the other hand is not nearly doing as well.

While I do agree there is a possibility of Ag hitting $20/oz, on the other hand I like to lock in profits.

Even Warren Buffett sold his silver after a couple of years.

I don't know about you, but my personal risk/reward assessment for my existing investment is saying to sell.

Despite their loyal following, precious metals are not generally good long term investments. Like other commodities, their price movement is no higher than inflation in the long run and they provide no yield. Over long periods of time, they have far underperformed stocks and real estate, and even provided lower returns than TBills and TBonds.

But there is a time for them. Usually that comes after years of outperformance of financial assets and attendant overvaluation, and years of monetary and credit excess. When financial assets finally begin to deflate and central banks try to push back with yet more monetary and credit excess, you definitely want to own them. Examining their very long term average performance won't show you this, you have to look at how they performed in different parts of the inflationary cycle.

[metalman]

Despite their loyal following, precious metals are not generally good long term investments. Like other commodities, their price movement is no higher than inflation in the long run and they provide no yield. Over long periods of time, they have far underperformed stocks and real estate, and even provided lower returns than TBills and TBonds.

But there is a time for them. Usually that comes after years of outperformance of financial assets and attendant overvaluation, and years of monetary and credit excess. When financial assets finally begin to deflate and central banks try to push back with yet more monetary and credit excess, you definitely want to own them. Examining their very long term average performance won't show you this, you have to look at how they performed in different parts of the inflationary cycle.
i agree with the finster completely. and i am metalman!

invest in humans. they produce wealth.

that is all.

[c1ue]

Finster, Metalman,

I totally agree with you both on principle.

My investments, however, are governed by my pragmatism.

While it is certainly possible that we achieve runaway inflation and/or dollar devaluation, and furthermore that I do believe that the present circumstances warrant something along those lines, it still does not mean that a major investment in gold/silver would be better for me than any other investment.

I'll give you a painful experience I had in this regard:

I used to work in Advanced Micro Devices as part of the K7/K8 internal AMD processor projects.

These were cancelled when AMD bought Nexgen in late 1996, and in the process brought in both the Nexgen CEO and CTO and also the Pentium verification head. My projects were cancelled and much subsequent turmoil ensued during which I decided my best interests lay outside AMD.

I knew then from my first hand experiences that the new AMD K8 and K9 projects were significantly ahead of Intel's, and furthermore that Intel's decision to (T)Itanic was wrong.

So even though I could not stomach continuing to work in AMD, I bought a lot of stock at a very cheap price waiting for the impact of these new projects on the company.

This did me well when the Athlon (K9) came along and really showed the world what Intel had been leaving on the table (actually trading off for heat).

However, fast forward to late 2001.

I had sold all of my AMD between 30 and 37 in the early 2000 period reasoning that the Internet bubble was adding a significant premium.

I watched AMD peak at over 45 in mid 2000, then freefall with the general market.

Then, as AMD was really starting to mint money, the stock started back up in early 2001.

I put a significant chunk of my profits into unhedged out of the money call options, was really rich for about 1 month, then basically got slammed.

Moral of story?

Other than I was greedy and got caught? :(

It is that being right doesn't mean you make money.

The K8 held its own, and the K9 was king of the hill for a full processor cycle. AMD was limited by a production ceiling, but the real problem was that the stock was priced to perfection.

The combination of less than stellar operational control and a generally lackluster market made it too difficult (for me at least) to time entry and and out.

Gold and silver definitely have the theoretical wind behind the sails, but there are ancillary effects which I am not comfortable with.

Among them:

1) Possible gold price manipulation due to gold's role as an inflation hedge
2) Gold mining company hedge books unwinding
3) A general liquidity crunch will affect all assets negatively

As the recent market declines have shown, gold can drop even as the market drops.

Really speaking the only scenarios which are unmitigated wins for PMs is the runaway inflation and/or major dollar devaluation actually happening.

[Andreuccio]

Another shoe falling: Newmont exits its gold hedges

http://media.corporate-ir.net/media_files/IROL/66/66018/7_05_07_Newmont_Eliminates_Gold_Hedges.pdf

A possible reason why gold was treading water/down slightly in the past month.

2nd shoe has dropped - there are many more to go.

There are probably around 30 Moz Au of hedges still left with AngloGold being the largest and Barrick's new mine finance hedge being similar size.

Hence my extreme caution w/ regards to gold as an investment.

Top 10 gold producers? For 2003:

Barrick+Placer (9.37 Moz Au)
Newmont (7.38)
AngloGold (5.63)
Gold Fields (4.2)
Harmony (3.33)
Rio Tinto (2.73)
Freeport (2.46)
Kinross (1.65)
Buenaventura (1.53)

http://www.mbendi.co.za/indy/ming/gold/p0005.htm


C1ue,

I saw this this morning. Thought it might interest you. :)


Gold de-hedging to top 12.9 million oz in 2007
Allan Seccombe
Posted: Wed, 28 Nov 2007

[miningmx.com (http://www.miningmx.com/)] -- THE global gold hedge book is now at its lowest level since 1992 after nearly a million more ounces were closed out in the third quarter of the year, and the full 2007 hedge reduction should top 12.86 million oz, according to the Société Générale Gold Hedge Book Analysis.
In the final quarter of this year, 1.75 million oz are scheduled to expire. If Newcrest’s 0.51 million oz and Red Back Mining’s retirement of its Chirano hedge position are taken into account, the full year’s hedge book reduction will “comfortably exceed 400 tonnes,” the report said.


http://www.miningmx.com/gold_silver/693700.htm

[jimmygu3]

-- THE global gold hedge book is now at its lowest level since 1992 after nearly a million more ounces were closed out in the third quarter of the year, and the full 2007 hedge reduction should top 12.86 million oz, according to the Société Générale Gold Hedge Book Analysis.http://www.miningmx.com/gold_silver/693700.htm

My immediate reaction is that this "lowest level since 1992" stat refers to ounces, not dollars. The number of ounces hedged in the '90s may have been greater, but with low prices and low volatility the miners weren't carrying huge unrealized losses like they are now.

The global hedge book stood at 32.6 million oz, with a negative marked-to-market value of $9.1bn at the end of the third quarter, deepening by $1.1bn, the report said.

My guess is that the chart of "negative marked-to-market value" would show the current $9.1bn to be the highest level since 1992, or perhaps all-time. Anyone have those stats?

[c1ue]

Good information - I have been watching it.

But the hedge book is still pretty big - more than 1 year's production.

The other issue is what the quality of the hedge book is.

In general, having a large but very out of money hedge is much better than a small but very underwater hedge.

From my experience, unwinding hedges usually leaves the sludge behind.

It would be in the interest of decreasing the sludge's impact that any manipulation would occur, hence my caution.

[Lukester]

Andreuccio -

I'm betting you will never get C1ue to sound more than grudgingly accomodating about gold and silver. :rolleyes:

[Andreuccio]

Andreuccio -

I'm betting you will never get C1ue to sound more than grudgingly accomodating about gold and silver. :rolleyes:

I don't really expect too. I posted this more as info relevant to the discussion rather than as an attempt to sway anyone.

[Starving Steve]

My immediate reaction is that this "lowest level since 1992" stat refers to ounces, not dollars. The number of ounces hedged in the '90s may have been greater, but with low prices and low volatility the miners weren't carrying huge unrealized losses like they are now.



My guess is that the chart of "negative marked-to-market value" would show the current $9.1bn to be the highest level since 1992, or perhaps all-time. Anyone have those stats?

Starving Steve here:

I am completely lost here. When I was in the coin biz. in the '80s, I used to hedge my precious metal inventory. Whatever my short position was in the hedgebook was AN OFFSET to the inventory of purchased precious metals that I had in my shop.

I assume mining hedgebooks are run similarly as an offset to what is produced in their mines. So, long as the hedgebook is managed to sell only what has been already produced, the hedgebook serves as an insurance policy against loss against unforseen market declines--- by disposing of production immediately as it is mined.

So, if a mining company desolves its hedgebook short position, that company must have sold current production (inventory) into the commodity market.

What I do not understand is how can news of a disolution of a hedged position be either bullish or bearish for the cash market? After all, the hedgebook tells the market what the company is holding and plans to sell as an insurance policy against market risk.

A company may close-out its hedged position after selling into the cash market or if the company wants to re-assume market risk for the inventory it has not sold. Neither of these hedgebook alternatives is necessarily bullish or bearish for the cash market.

So, fill me in here: what am I missing? To me, hedgebook operations are rather meaningless for the cash market or the futures market.

[Tulpen]

sorry, never mind.
moderator, please delete.

[Andreuccio]

Starving Steve here:

I am completely lost here. When I was in the coin biz. in the '80s, I used to hedge my precious metal inventory. Whatever my short position was in the hedgebook was AN OFFSET to the inventory of purchased precious metals that I had in my shop.

I assume mining hedgebooks are run similarly as an offset to what is produced in their mines. So, long as the hedgebook is managed to sell only what has been already produced, the hedgebook serves as an insurance policy against loss against unforseen market declines--- by disposing of production immediately as it is mined.

So, if a mining company desolves its hedgebook short position, that company must have sold current production (inventory) into the commodity market.

What I do not understand is how can news of a disolution of a hedged position be either bullish or bearish for the cash market? After all, the hedgebook tells the market what the company is holding and plans to sell as an insurance policy against market risk.

A company may close-out its hedged position after selling into the cash market or if the company wants to re-assume market risk for the inventory it has not sold. Neither of these hedgebook alternatives is necessarily bullish or bearish for the cash market.

So, fill me in here: what am I missing? To me, hedgebook operations are rather meaningless for the cash market or the futures market.

I don't fully understand it, either, but the response C1ue gave above to a similar question by me was:


Anyway, as to why I do not dare touch gold with a mountain of existing under-water derivatives held by Barrick Gold and others:

1) The amount of gold involved is greater (for Barrick and for 1 other certainly) than the yearly amount of gold mined by the respective companies. Thus it is not a case of making less money, but rather that these chumps CANNOT escape their bad bets without forking over big cash.

2) In the process of riding out this loss-making derivative storm, any means needed to reduce losses will be employed. This is not a case where the losing player is so small that affecting the market is difficult without other players possibly getting a free ride - rather - it would be stupid not to employ more money to reduce losses given that the derivatives position is a significant chunk of the market.

Thus I fully expect a 9 digit war chest per company available for machinations, plus potential playing with production to also influence the market.

As for where I get my information: keep in mind Barrick acquired Placer Dome.

This was completed at the end of 2006Q1.

Between Barrick and Placer, they combined for something like 21M Au.Oz of put derivatives.

Barrick themselves say they have disposed of 9M Au.Oz puts in 2006, plus another 2M Au.Oz puts in 2007Q1 (hence the $500M derivative loss and $159M overall loss).

Unless something funny has happened, that tells me there are somewhere around 10M Au.Oz still contracted out. Placer produces some 8M Au.Oz a year, so likely they will finish out the year by just eating the loss with production, but note that this will kill their bottom line.

This is no longer a loss, but rather a lack of gain, but note that Barrick is not the only entity with such positions.

I have zero desire in putting my money into a commodity where some entities with large war chests may try a market maneuver to reduce their losses.

[Spartacus]

What's being communicated by the de-hedging is - no company is willing to sell future production at today's prices.

If in your case you had become 99.9% sure the price had to rise, could you justify the cost of doing the hedging - fees, transaction costs, etc... all extra costs.

The situation for mining companies may be much worse. I don't know how much Gold mining hedging must be paid in gold ounces, NOT dollars. If gold goes to $3,000 does the company sell the gold and use $500 to close a short written at $500 ?

If it must be repaid in ounces, the cost of past hedges is actually rising with the rise in Gold prices.

Starving Steve here:

I am completely lost here. When I was in the coin biz. in the '80s, I used to hedge my precious metal inventory. Whatever my short position was in the hedgebook was AN OFFSET to the inventory of purchased precious metals that I had in my shop.

I assume mining hedgebooks are run similarly as an offset to what is produced in their mines. So, long as the hedgebook is managed to sell only what has been already produced, the hedgebook serves as an insurance policy against loss against unforseen market declines--- by disposing of production immediately as it is mined.

So, if a mining company desolves its hedgebook short position, that company must have sold current production (inventory) into the commodity market. or taken a loan Or raised capital or debt via some other means. to cover the hedge book - they perceive the loan as being cheaper than hedging real gold.



What I do not understand is how can news of a disolution of a hedged position be either bullish or bearish for the cash market? After all, the hedgebook tells the market what the company is holding and plans to sell as an insurance policy against market risk.

A company may close-out its hedged position after selling into the cash market or if the company wants to re-assume market risk for the inventory it has not sold. Neither of these hedgebook alternatives is necessarily bullish or bearish for the cash market.

So, fill me in here: what am I missing? To me, hedgebook operations are rather meaningless for the cash market or the futures market.

[c1ue]

Steve,

You are correct that a hedge theoretically only has to be repaid with production.

However, the key difference between your hedge and a miner's hedge is that your hedge is a bit of cash paid to insure against a short term loss while the miner's hedges were being used to 'pig lipstick' their balance sheets.

This is because your hedge was covering an essentially zero maintenance cost inventory (at least vs. your normal expenses), but the miner's hedge forwarded present cash for future production - the expense of which is now in the past.

Thus while ongoing operations will cough up production to repay the hedge, the mining company has to pay for the equipment, labor, etc to produce said material. If the mining company took the original hedge sale funds and kept them around or gainfully employed them, a failed hedge would not be so bad - but what is more likely is that the past hedge payments were spent.

Thus mining companies with large hedge books could be facing years of operations with zero income, much less profit.

In this light, using some cash to play with the impact of said hedging definitely is an option which could be beneficial.

[Starving Steve]

Steve,

You are correct that a hedge theoretically only has to be repaid with production.

However, the key difference between your hedge and a miner's hedge is that your hedge is a bit of cash paid to insure against a short term loss while the miner's hedges were being used to 'pig lipstick' their balance sheets.

This is because your hedge was covering an essentially zero maintenance cost inventory (at least vs. your normal expenses), but the miner's hedge forwarded present cash for future production - the expense of which is now in the past.

Thus while ongoing operations will cough up production to repay the hedge, the mining company has to pay for the equipment, labor, etc to produce said material. If the mining company took the original hedge sale funds and kept them around or gainfully employed them, a failed hedge would not be so bad - but what is more likely is that the past hedge payments were spent.

Thus mining companies with large hedge books could be facing years of operations with zero income, much less profit.

In this light, using some cash to play with the impact of said hedging definitely is an option which could be beneficial.

Thank you for your reply. Now I see your point.

So, a mining company could dress-up its balance sheet by selling short into its hedgebook, then taking the proceeds of the short-sale and go off and have beer parties down in the mine. Meanwhile, the balance sheet of the company looks great, and idiots like me invest their life savings in the company's stock.

And the day of reckoning comes when next year arrives and the price of gold is up, along with the price of energy, the price of mining equipment, labour costs, royalties, etc. The hedgebook goes underwater, but no gold has been poured down in the mill.

Not to worry, just sell some more company stock.

Sounds like hedging may be to mining what using your house as an ATM machine is in real estate. :rolleyes:

[c1ue]

Exactly correct analogy.

I'm not saying this is what has happened; only those who see the actual accounts in the various companies know.

But I don't like sticking on an antlered hat and wandering around Texas in deer season either.

[c1ue]

Wandered across this link to energy usage by the Olympic Dam mine.

http://hsecreport.bhpbilliton.com/wmc/2004/performance/odo/data/index.htm

In particular:


2000 2001 2002 2003 2004
<TABLE class=edttable cellSpacing=1 summary="Environmental data for Olympic Dam Operations 2000 - 2004."><TBODY><TR><TD class=header scope=row>Energy Usage (terajoules)</TD><TD>5,183</TD><TD>5,216</TD><TD>4,881</TD><TD>4,667</TD><TD>5,477</TD></TR></TBODY></TABLE>


Using 1 terajoules = 277777.778 kilowatt hours

you get about 1.5B KwH usage for 2004. Assuming a 2.5 cent KwH cost, this represents $38M a year in electrical costs.

Output from this mine:

102,236oz Au
896,000oz Ag
85,000 tons Cu
4341t U

From: http://www.mining-technology.com/projects/olympic/

Using these values for present sale costs of the above:

Au/oz = $800, Ag/oz = $14, Cu/ton = $6500, U/t = 1000 kg/t? = $130/kg

Total value of extracted minerals: $1.2B

So energy content of retail price of mine is about 3%

However, look at this another way: If the gold was hedged to be sold at lower than retail prices - say $400, the relative cost of the energy alone would have doubled.

BHP's gross margin is around 33 now; a shift of 3% of gross margin would have pretty significant impact on their bottom line.

Hedges above $400 would not be that big a deal, but hedges much below $400 become more an more problematic.

I also don't know how Olympic ranks vs. other mines; it is relatively new (1999) so I would assume that these performance numbers are significantly better than average.

[Finster]

1000 oz of Ag - what to do?

Balance it with 10 oz Pt, 50 oz Au, and 5000 oz Cu. In about 3-5 years, sell it and buy stocks and bonds.

[Lukester]

AKA - how to obviate miles and yet more endless miles of complex, convoluted investment deliberations for an inflationary decade, in one (very short) sentence. :)

[Andreuccio]

Good information - I have been watching it.

But the hedge book is still pretty big - more than 1 year's production.

The other issue is what the quality of the hedge book is.

In general, having a large but very out of money hedge is much better than a small but very underwater hedge.

From my experience, unwinding hedges usually leaves the sludge behind.

It would be in the interest of decreasing the sludge's impact that any manipulation would occur, hence my caution.

Here's another article I saw this morning re miners closing down hedges:

http://www.wabusinessnews.com.au/en-story.php?/1/59671/AngloGold-Ashanti-to-close-gold-hedge-book


The world's third largest gold producer AngloGold Ashanti Ltd has confirmed it will completely close down its hedge book to take advantage of high spot market prices for the yellow metal.

...

It is among many gold producers seeking to close or greatly reduce its hedge book, including the world's top two gold producers - Canada's Barrick Gold Corporation and America's Newmont Mining Corporation.