Why to buy Gold or why not to buy Gold? you decide...

IndianHeadMan

Initial reaction makes me want to say buy, but after thinking about this I may just stay out of it.


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supercoin

My uninformed off-the-cuff reaction to that article:

First, why would a gold mining company (Barrick) want to suppress gold prices over a long period of time? That would come directly out of their mining profits.

More generally, if global income/wealth growth since 1987 means that gold "should" be at $740 as Blanchard claims, it already would be. Two consipirers can't keep such a huge market down for 15 years.

Frankly it sounds to me like Blanchard steered some people wrong and doesn't want to take the heat.

MrKelso

<< <i>First, why would a gold mining company (Barrick) want to suppress gold prices over a long period of time? That would come directly out of their mining profits. >>



Supercoin

The way it was explained to me a while back is that it has something to do with forward sales of Gold. What that is goes way over my head but it was explained that due to forward sales that if Gold goes up the company looses money and it has caused some companies to go bankrupt during upward Gold swings. I don't fully understand the mechanics behind all of this and have been trying to research forward gold sales for the last few weeks now. It is a very interesting subject i think.

TWODOGS

<< <i>Two consipirers can't keep such a huge market down for 15 years. >>

All it's really taken is one. Allan Greenspan.

supercoin

Forward sales should work like this...

TWODOGS is going out in the desert to pan for gold. He anticipates scrounging up 1 oz for his two months effort. Since he's frugal and plans to shoot rats to feed his dogs, his anticipated expenses are only $300.

Since gold is at $340 right now, that's a mighty $40 profit, and he's eager to lock that price in to ensure he makes about a quarter per hour on his labor.

Being a risk adverse guy, he doesn't want to come back from the desert two months from now and potentially face the heartbreak of seeing gold prices have plummeted, forcing him to eat his dogs to live.

So, before he leaves, he sells a gold futures contract at $340 that obligates a buyer to pay him $340 for an ounce of gold in 2 months time. Conversely, he is obligated to deliver the gold. So he's locked in his profits -- in two months he delivers the gold and gets $340 no matter what.

In reality in the futures markets, physical delivery rarely takes place. Instead you simply close out your contract on the open market.

In that case, when he returns from the desert two months from now with his bag of dust, there are several possible scenarios:

- Gold is still at $340. His futures contract is unchanged. He closes out his contract at no profit/loss and sells his dust for $340 at the local saloon/whorehouse (sticking with the old west theme here).

- Gold has plummeted to $240 due to Fort Knox having a "take all you want" day. Local saloon gives him only $240 ($100 less than he was hoping), but he can also buy back his futures contract on the open market for only $240. Since he previously sold the contract for $340, that's a $100 profit. His net is still $340.

- Gold has spiked up to $440 and he's a big shot at the saloon, a girl on either arm. But his contract still obligates him at $340, so he'd better forgoe the daily double special 'cause he's got to pay the piper. His contract has gone up in value to $440, so when he buys it back it's at a $100 loss. But again, his net is still $340.


So... the futures contract allows him to avoid the risk in the market and lock in a $340 price even without physically delivering the gold to the commodities exchange in New York. In reality he doesn't quite get $340 because of commissions and spreads on the contracts, but that's the basic idea.

-----------

Back to the gold mine -- if the gold mine is selling futures contracts based on their gold production, they shouldn't care which way gold prices go in the short term. In the long term, they would still want gold prices to go up because the more expensive gold is, the more they sell contracts for, and the more money they make.

It seems to me that a mine could only get hurt by gold prices going up if they start speculating and selling more contracts than they are physically producing.

In TWODOGS example, if he slacked off and only came back with half an ounce of gold, he'd better hope gold prices has declined, because his contract still obligates him to deliver an ounce at $340.

lazeroo

how about thinking of it this way !

Why everyone on this forum has been debating what will happen to gold over the last 2 years
I've made a bundle on it ! I sold all my barrick gold stocks 3 months ago and it was pretty good to me.

I have been telling everyone for 2 years to buy gold , and if you did you would be sitting fat right now.

sinin1

Supersoin - what would happen if a large producer started working with a large bank and between the 2 of them they have DEEP pockets -> the mining company decides $340 is okay but what if they sell 5 times what they actually produce, then they make $700 per ounce sold.

Although not really a true hedge, but actually a strong speculation hidden in the pretense of a hedge. Then the prices start rising, they are the wrong side of the market - what to do? Sell more and hope to eventually push the prices back down where they were making big bucks or bite the bullet and reverse the contracts to get back to a true hedge or let many contracts expire or turn the speculation around and start buying?

It has happened before with some big organizations -> Barings bank with Nikkei , Dawia with Copper, and others -- So if JP Morgan all of a sudden loses a few trillion, will they get bailed out by the government?

I have seen market manipulation for years -> Kraft owns the dairy market, have made billions while turning dairy farmers into slaves, It will take an awful lot to get them out of that position.

supercoin

I suppose if you were a mining company you could sell a bunch of contracts and scare people into thinking prices were going down because they would assume you are selling contracts to cover a bunch of gold you actually have in production. But at some point, you gotta buy those contracts back and/or come up with the gold. So while I think such a scheme might work in the short term, I don't see how it could suppress prices for 15 years.

If the supply/demand really means gold should be at $740 as Barrick claims, it would be. If people all over wanted to buy physical gold, it has to come from somewhere.

I don't claim to be an expert on the workings of the gold market, but it seems that gold bugs have been claiming for decades that somebody or another is artificially keeping the price of gold down, and it just doesn't ring true for me. A much simpler explanation, it seems to me, is that we just have more gold than we know what to do with. Tons of it are sitting around with no real use other than hoarding, and people haven't been inclined to do that in large amounts (though apparently more are recently).


PS -- Futures contracts don't "expire" like options. Though maybe selling options would be better for such a scheme, because then all you have to do is keep gold prices stable until expiration to make money, not drive them down. Risky business either way, though.

MrKelso

Well Supercoin i Thank you for the lesson, it was great. I don't consider myself an expert but i do try to invest using old and wise biblical principles and it is always for the long term. Over the years i have watched it go up and down like a roller coaster but i still buy it and hold it both Gold and Silver. To me paper money is an every day tool that i have been blessed with but real money will break your toe if you drop it and it happens to land on your toe as for rare coins just a great hobby with a possible investment potential if purchased correctly.

PS the whole twodogs thing still has me rolling,,,,,, excellent

roadrunner

I have no problem believing the story. Manipulation of the market for 15 years appears to have been going on. It doesn't take a whole lot of gold dumping to scare away the gold bugs.....at least until now. Even our own Fed has probably been in on the game.
Do you really think gold has traded in a fully free market for the past 15 years? No more free that what propelled Enron and others to their dizzying heights. Deceipt and trickery.

The house of derivatives is getting weaker and weaker. JP Morgan has far more to worry about with their big share of the many TRILLIONs of dollars of financial derivatives at risk than to keep trying to plug the leaks in their share of the relatively smaller gold derivative market. For some interesting and insightful reading on gold derivatives see www.financialsense.com.

roadrunner

merysu

Just remember Gold is the only financial asset that isn't simultaneously someone else's liability, then tell me the Central Banks don't work together to keep its price in check. Think about it -mark-

supercoin

Ok, I thought about it, I don't get it. Can you elaborate?

Why should central banks care what people do with gold? If anything, since many central banks still hold large quantities of gold -- wouldn't they like it to rise?

And no, I'm not short gold futures or part of the conspiracy.

coynclecter

Funny, when gold was at 270, no one cared. Now its 350 and they want to buy.

Its only because of the war hawks looking for a profit. When that ends, war or not, the Central banks will again supress the prices. Should still hang around 300.

MrKelso

<< <i>Funny, when gold was at 270, no one cared. Now its 350 and they want to buy.

Its only because of the war hawks looking for a profit. When that ends, war or not, the Central banks will again supress the prices. Should still hang around 300. >>




Yes there will come a time to dump it all and start the accumulation process all over again. 10 Years untill the next rally. Gold is a done deal it's going through the roof now.. The time to watch SILVER is now here. The small investor will run this metal up next. Morgans always do real well in these runs.