I saw a post which went along the lines of "hedging is just like...

I saw a post which went along the lines of "hedging is just like financing that industrials undertake .. project finance .. its not a big issue for me.."

Sorry, but hedging is not just a big issue - it is a serious issue.

Under the new accounting rules that companies have to adopt it has the potential to destroy shareholder wealth.

I've posted on this before. It appears some people just do not understand.

If a gold miner borrowed money from a bank to provide finance for its mine, it had to put up its project as security. In addition, the bank required the company to hedge future production.

The company now must record as a profit or loss the difference between the value of its hedges and current market prices.

Suppose a company has 200,000 ounces of future production hedged at US$350 and gold jumps to US$600 next year. The company has to declare a loss of US$50 million from this hedge position.

This could mean the company is in breach of its loan arrangements with the bank and so the bank can acquire the company's gold mine.

It's that simple.

HEDGING IS NOT LIKE FINANCING THAT INDUSTRIALS UNDERTAKE.

It NOW has the potential to destroy companies that have borrowed money from banks and cannot immediately repay that money.