Originally posted by wassa
Zeeshan,
The reason gold is hedged at a higher price forward is that traders are speculating
some events will drive gold prices higher, thus having supply locked will provide them a profit.
But zinc is not gold. Whilst they may all come from the mining industry, sometimes even the same
mine they are different products with different production levels,supply constraints, stockpiles,
production costs, country risks etc., hence some metals rise and others fall.
You're logic assumes if corn futures rise than wool must go up as it all comes from a similar
Industry.....a farm. It does not work like that, sorry.
So, SHORT TERM HEDGING, production is already produced, processed and on the ground ready for
sale. No production risk whatsoever.
Hypothetically when it is sold today at 1.20 RVR take a short term hedge....insurance for
a fee to be paid today's price in 2 months time when final assaying is done and final payment is
payed no matter what the price is at that time. This guarantees the company can budget as they
are clear on the income for each shipment. ( This is why they hedged the prior shipment at 1.17 )
This service costs a fee like insuring anything.
LONG TERM ( FORWARD ) HEDGING. Production hedged forward on fixed volume for 12,18, 24
months whatever the contract maybe. The company must keep supply no matter what production
problems they have and also to the contract specifications so not only tonnage but grade,
Impurities etc. You should remember that the grades and resources are only calculated from
surface drilling data, so both could vary widely in real time production. Far too risky for a new
mine to hedge. So that's the risk factor.
Why do think commodity traders lock in pricing and supply for the future ?
It's not to help the miners......They do it to make money. By the time the metal is supplied
they speculate that it will be worth more or have on sold it for more. Hence they take the profit.
If traders think the price will drop they won't hedge at the current price.
Hedging is a form of gambling, the traders take a calculated gamble, the miners get a
long term price but usually lose as the traders pick up the upside.
It's a simple explanation I have offered.....hopefully it's not too confusing.
Wassa.
Thank you for your patient explanation. Now you understand why I posted this three weeks ago.
There are none so deaf as those that will not hear.
There are none so blind as those that will not see.
