Many dealers made more money through hedging their inventory than selling coins in 2013

NeoclassicalAnalyst · January 1, 2014 4:17AM

Many dealers made more money through hedging their inventory than selling coins in 2013....interesting year...

TwoSides2aCoin · January 1, 2014 4:25AM

Please explain.

NeoclassicalAnalyst · January 1, 2014 4:28AM

Talking about modern and bullion dealers....

bidask · January 1, 2014 4:37AM

Please explain how coin dealers hedge their inventory with modem and bullion?

NeoclassicalAnalyst · January 1, 2014 4:48AM

<< Please explain how coin dealers hedge their inventory with modem and bullion? >>

Ok for educational purpose, here is a brief explanation from the web

While many buyers main concern is price, what they don’t realize is that when making a buying decision simply on the cost of a product, in many cases you are taking on counterparty risk that you are likely totally unaware of, especially when doing business with large internet bullion dealers. Just as farmers hedge their crops from natural disaster and weather, large bullion dealers must hedge their inventory against downward price fluctuations in the Gold and Silver that they hold. These hedges are usually placed through a broker and then cleared through a clearing house like MF Global, a large firm headed by Jon Corzine who recently declared bankruptcy. when bullion dealers hedge their inventory, their trades are executed on the COMEX exchange, a trading bourse that openly admits to leveraging their Gold and Silver trading to over 100 times the amount of actual physical metal they have on hand to deliver.

ebaytrader · January 1, 2014 4:53AM

<< Please explain how coin dealers hedge their inventory with modem and bullion? >>

You short the value of the wholesale purchase of physical bullion in a brokerage account and lock in your gross margin.

bidask · January 1, 2014 4:53AM

<< 

<< Please explain how coin dealers hedge their inventory with modem and bullion? >>

Ok for educational purpose, here is a brief explanation from the web

While many buyers main concern is price, what they don’t realize is that when making a buying decision simply on the cost of a product, in many cases you are taking on counterparty risk that you are likely totally unaware of, especially when doing business with large internet bullion dealers. Just as farmers hedge their crops from natural disaster and weather, large bullion dealers must hedge their inventory against downward price fluctuations in the Gold and Silver that they hold. These hedges are usually placed through a broker and then cleared through a clearing house like MF Global, a large firm headed by Jon Corzine who recently declared bankruptcy. when bullion dealers hedge their inventory, their trades are executed on the COMEX exchange, a trading bourse that openly admits to leveraging their Gold and Silver trading to over 100 times the amount of actual physical metal they have on hand to deliver. >>

So your describing the use of futures it sounds like. You think 'many dealers' hedged by selling in the futures market?

It seems to me most bullion dealers I know were bullish on gold and did not short but took baths on their long positions. Not all but most imo.

metalmeister · January 1, 2014 4:56AM

I would just love to see a run on gold and silver to take down the shorts leveraged at 100:1

NeoclassicalAnalyst · January 1, 2014 5:02AM

<< 

<< 

<< Please explain how coin dealers hedge their inventory with modem and bullion? >>

Ok for educational purpose, here is a brief explanation from the web

While many buyers main concern is price, what they don’t realize is that when making a buying decision simply on the cost of a product, in many cases you are taking on counterparty risk that you are likely totally unaware of, especially when doing business with large internet bullion dealers. Just as farmers hedge their crops from natural disaster and weather, large bullion dealers must hedge their inventory against downward price fluctuations in the Gold and Silver that they hold. These hedges are usually placed through a broker and then cleared through a clearing house like MF Global, a large firm headed by Jon Corzine who recently declared bankruptcy. when bullion dealers hedge their inventory, their trades are executed on the COMEX exchange, a trading bourse that openly admits to leveraging their Gold and Silver trading to over 100 times the amount of actual physical metal they have on hand to deliver. >>

So your describing the use of futures it sounds like. You think 'many dealers' hedged by selling in the futures market?

It seems to me most bullion dealers I know were bullish on gold and did not short but took baths on their long positions. Not all but most imo. >>

Most large, reputable bullion dealers have solid hedging team working with their metal brokers 24/7. There are always some exceptions. Those dealers have suffered tremendously over last year.

MrEureka · January 1, 2014 5:07AM

Many dealers made more money through hedging their inventory than selling coins in 2013

This is an exaggeration. First of all, a dealer that hedges his inventory perfectly had no net profit from the activity. Second, even if an imperfect hedge nets the dealer a profit, which would not be unusual, his net hedging gain is unlikely to exceed his wholesale and retail profits for the year.

Hedging activities can, however, throw off a lot of cash in a declining market. For example, consider a dealer that maintains a physical inventory of 1000 American Gold Eagles. To hedge the position, he might have shorted 1000 ounces of gold at $1800 in the futures market. A year later, he still has 1000 AGE's, which are now worth $1200 each. He now has a $600,000 paper loss on his physical gold, but he also has $600,000 in instant liquidity sitting in his futures account.

Another way to look at this is, essentially, that the dealer has unintentionally liquidated one third of his investment, leaving him swimming in cash. But there's no profit in the trade.

NeoclassicalAnalyst · January 1, 2014 5:18AM

Agree, just depends on how you see this gain/loss. You calculate your net gain/loss from your short positions and your unsold inventory in one step. I do it in two steps, basically, your net profit=your hedging gains through your short position+ retail/wholesale profit from your hedged inventory- your inventory write off.

<< Many dealers made more money through hedging their inventory than selling coins in 2013

This is an exaggeration. First of all, a dealer that hedges his inventory perfectly had no net profit from the activity. Second, even if an imperfect hedge nets the dealer a profit, which would not be unusual, his net hedging gain is unlikely to exceed his wholesale and retail profits for the year.

Hedging activities can, however, throw off a lot of cash in a declining market. For example, consider a dealer that maintains a physical inventory of 1000 American Gold Eagles. To hedge the position, he might have shorted 1000 ounces of gold at $1800 in the futures market. A year later, he still has 1000 AGE's, which are now worth $1200 each. He now has a $600,000 paper loss on his physical gold, but he also has $600,000 in instant liquidity sitting in his futures account.

Another way to look at this is, essentially, that the dealer has unintentionally liquidated one third of his investment, leaving him swimming in cash. But there's no profit in the trade. >>

roadrunner · January 1, 2014 5:36AM

<< 

<< Please explain how coin dealers hedge their inventory with modem and bullion? >>

Ok for educational purpose, here is a brief explanation from the web

While many buyers main concern is price, what they don’t realize is that when making a buying decision simply on the cost of a product, in many cases you are taking on counterparty risk that you are likely totally unaware of, especially when doing business with large internet bullion dealers. Just as farmers hedge their crops from natural disaster and weather, large bullion dealers must hedge their inventory against downward price fluctuations in the Gold and Silver that they hold. These hedges are usually placed through a broker and then cleared through a clearing house like MF Global, a large firm headed by Jon Corzine who recently declared bankruptcy. when bullion dealers hedge their inventory, their trades are executed on the COMEX exchange, a trading bourse that openly admits to leveraging their Gold and Silver trading to over 100 times the amount of actual physical metal they have on hand to deliver. >>

Basic assumption is that they hedge in the right direction, at the right time, with the right amount of their net worth. This is almost never true. It's usually the true commercial hedgers that have no clue where prices are going.
They just hedge to keep things steady or stable. An example of this are the gold miners. They were hedging from 2001-2004 until it became clear they were very wrong. It's doubtful many of them hedged into the crash
of 2008. And you look at the whipsawing in gold from late August 2011-April 11th 2013 I dare you to find any "hedgers" that played those numerous whipsaws effectively. More than likely they got their butts kicked, especially
on those swift rebounds. The majority of the drop in 2013 came on 2-3 days in April when gold dropped about $300. It's very unlikely bullion shop or coin dealer "hedgers" were sharp enough to hedge that drop and then get
right back out before the $150 rebound. The same basic thing occurred in June.

This same logic (applied in reverse) should apply to gold's run up from Oct 2008 to Sept 2011, especially the final move from $1488 to $1923 that took less than 2 months. Seems to me that these same "hedgers" would
have been getting nervous as gold climbed past $1600 and would have taken out hedges to cover them if the price went down. This would have cut into their profits as gold rose. It makes no sense to me that they hedged in
2013 on the way down, yet didn't do the same thing in 2011 as gold skyrocketed. Fwiw, the gold miners failed to hedge for most of 2013 and got their butts handed to them in their income statements. I don't see how coin
dealers are any smarter about gold price movements than the guys who mine the metal for a living. You can't have it both ways unless your name is JPM or Goldman Sachs. I'd like to have seen these hedgers play August - Sept 2011 correctly as gold moved to $1912, then collapsed to $1702 in a couple of days, then bounced back to $1923 in 1-2 weeks, then caved in again. I could only imagine those getting short gold at $1702 only to see if bounce against them to $1923. Shorting is easy....in hindsight.

NeoclassicalAnalyst · January 1, 2014 5:59AM

That's exactly why big dealers normally have a team working on managing their hedging positions. Their hedging position are much more complicated than holding some short future contact. They typically have future contracts with many different settlement dates, some even holds short term and LEAP options positions on precious metals. In recent years, several brokers on WS has simplified their trading systems that make it easier for dealers to manage their hedging positions on a daily basis. With that said, some big dealers are always slightly long-biased, normally hedging only 70% to 90% of their inventory. Nevertheless, those hedging positions have significantly mitigated the their risks. Small or medium size dealers usually do not hedge their position (partially because of the economy of scale in hedging and partially because of their lack of financial sophistication), which make them more susceptible to boom and bust in the precious metal market.

<< 

<< 

<< Please explain how coin dealers hedge their inventory with modem and bullion? >>

Ok for educational purpose, here is a brief explanation from the web

While many buyers main concern is price, what they don’t realize is that when making a buying decision simply on the cost of a product, in many cases you are taking on counterparty risk that you are likely totally unaware of, especially when doing business with large internet bullion dealers. Just as farmers hedge their crops from natural disaster and weather, large bullion dealers must hedge their inventory against downward price fluctuations in the Gold and Silver that they hold. These hedges are usually placed through a broker and then cleared through a clearing house like MF Global, a large firm headed by Jon Corzine who recently declared bankruptcy. when bullion dealers hedge their inventory, their trades are executed on the COMEX exchange, a trading bourse that openly admits to leveraging their Gold and Silver trading to over 100 times the amount of actual physical metal they have on hand to deliver. >>

Basic assumption is that they hedge in the right direction, at the right time, with the right amount of their net worth. This is almost never true. It's usually the true commercial hedgers that have no clue where prices are going.
They just hedge to keep things steady or stable. An example of this are the gold miners. They were hedging from 2001-2004 until it became clear they were very wrong. It's doubtful many of them hedged into the crash
of 2008. And you look at the whipsawing in gold from late August 2011-April 11th 2013 I dare you to find any "hedgers" that played those numerous whipsaws effectively. More than likely they got their butts kicked, especially
on those swift rebounds. The majority of the drop in 2013 came on 2-3 days in April when gold dropped about $300. It's very unlikely bullion shop or coin dealer "hedgers" were sharp enough to hedge that drop and then get
right back out before the $150 rebound. The same basic thing occurred in June.

This same logic (applied in reverse) should apply to gold's run up from Oct 2008 to Sept 2011, especially the final move from $1488 to $1923 that took less than 2 months. Seems to me that these same "hedgers" would
have been getting nervous as gold climbed past $1600 and would have taken out hedges to cover them if the price went down. This would have cut into their profits as gold rose. It makes no sense to me that they hedged in
2013 on the way down, yet didn't do the same thing in 2011 as gold skyrocketed. Fwiw, the gold miners failed to hedge for most of 2013 and got their butts handed to them in their income statements. I don't see how coin
dealers are any smarter about gold price movements than the guys who mine the metal for a living. You can't have it both ways unless your name is JPM or Goldman Sachs. I'd like to have seen these hedgers play August - Sept 2011 correctly as gold moved to $1912, then collapsed to $1702 in a couple of days, then bounced back to $1923 in 1-2 weeks, then caved in again. I could only imagine those getting short gold at $1702 only to see if bounce against them to $1923. Shorting is easy....in hindsight. >>

CaptHenway · January 1, 2014 6:11AM

I agree that many dealers hedge their bullion inventory, but how can you say what they did without having access to their financial records?

derryb · January 1, 2014 6:11AM

one would hedge against precious metal coin or bullion inventory losses by betting in the futures market that the particular metal price will go down (shorting). While this may protect a holder of bullion in a declining price market it also costs the holder of bullion in a rising price market. Think of it in terms of betting on red AND on black at the roulette wheel. You can make $5 profit by betting $10 on the winning color and only $5 on the loser.

The only way a dealer would profit by hedging (shorting in this case) is to have more money tied up in the hedge than in the physical inventory where the physical price declined. While hedging offers protection it also reduces potential profit. It is insurance that cost money.

<< I would just love to see a run on gold and silver to take down the shorts leveraged at 100:1 >>

You will see it if price can gain momentum. The bailing out of the shorts in a price run will further fuel the price run.

CoinRaritiesOnline · January 1, 2014 6:14AM

Nothing stirs a passion for coin collecting like a discussion of hedging.

MrEureka · January 1, 2014 6:25AM

Nothing stirs a passion for coin collecting like a discussion of hedging.

And nothing stirs a passion for a drink like coin collectors discussing hedging!

revoldlog · January 1, 2014 6:30AM

<< I do it in two steps, basically, your net profit=your hedging gains through your short position+ retail/wholesale profit from your hedged inventory- your inventory write off.

<< Many dealers made more money through hedging their inventory than selling coins in 2013

>>

Using your equation:

net profit=(a) your hedging gains +(b) retail/wholesale profit - (c) your inventory write off.
where, (a) "your hedging gains" should equals (c) "your inventory write off", assuming a perfect hedge.

Therefore, using your equation:
net profit = a + b - c ==>
net profit= retail/wholesale profit from your hedged inventory.

Technically, there should be no profit making by hedging their inventory.

But I tell you a story, there is a person I know he really makes money from hedging.

As some of you may remember, there was an ebay seller selling AGE for extremely low price, the price is so low that if you take immediate delivery, you can make a profit by selling them to online dealers. The only catch was he usually deliver in 3 months. That person brought few hundred thousand dollar worth of gold eagle using his credit card's. Worried the price of gold may drop, he hedged his position through selling shorts.

And if you remember, that ebay seller disappeared when the price of gold tanked. That person earned close to 6 figures from the shorts. He then use paypal protection + credit to dispute all the charges. Eventually, he was banned from ebay and paypal, but I think it was well worth for his effort.

NeoclassicalAnalyst · January 1, 2014 6:35AM

Great, you got my point. I am talking about the hedging gain from your short positions, not about the net gain from hedging (which in theory is zero, in reality normally negative because of transaction costs). Now you can interpret my statement in this way---many dealer's hedging positions have protected them from disastrous inventory write-off. hope this clarify

<< 

<< Agree, just depends on how you see this gain/loss. You calculate your net gain/loss from your short positions and your unsold inventory in one step. I do it in two steps, basically, your net profit=your hedging gains through your short position+ retail/wholesale profit from your hedged inventory- your inventory write off.

<< Many dealers made more money through hedging their inventory than selling coins in 2013

>>

Still, in your equation:
net profit=your hedging gains through your short position+ retail/wholesale profit from your hedged inventory- your inventory write off.
Where:
"your hedging gains through your short position" should equals "your inventory write off".

Therefore, using your equation:
net profit= retail/wholesale profit from your hedged inventory.

The first term cancels out the third term. >>

3keepSECRETif2rDEAD · January 1, 2014 6:51AM

...this thread is interesting but it hurts to have read it while severely hungover....my head hurts

Erik

Many dealers made more money through hedging their inventory than selling coins in 2013

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