Hi, If anyone could shed some light on how gold miners/producers hedge their position? I have a good understanding of how it is done in the agri mkts but not sure what would be the optimal hedging instrument for a gold producer. Would it be: 1. Gold futures 2. Gold ETF's, if so, single etf or a basket 3. Basket of mining stocks 4. option baskets consisting of puts or short calls for cost purposes, i'm assuming mkt participants would pick option 2 over 3 but i just wanted to float it around and see your thoughts. Also, is the gold/silver ration of 16-1 ever used for hedging purposes? or simply speculative purposes?
Depends on the hedger, the market, and their credit agreements. Most banks link any loans with forced hedging of most, if not all, future production. More often than not producers simply sell futures or swaps forward; or they purchase outright puts, sell covered calls, etc. No one uses the silver/gold spread or ETFs to hedge.
thank you for that. I'm surprised to see that no producer would use gold etf's to hedge their books. seems like it would be an option... then it's very similar to the agri mkts - simple use of outright futures or puts/short calls!
Also something to keep in mind is that a lot of miners have different hedging strategies and some dont hedge at all. In recent years there was a move away from hedging mainly as the miners worked out they lost more money with complicated hedges set up by investment banks - as mentioned above linked to credit loans. I dont think there is one size fits (especially with different currencies)
So what would be some of those hedging strategies, other than outright futures or credit linked notes?
==================== Not a gold or silver miner[partial disclosure]. A silver mine ''hedge'' in futures, they must have sold'em; because they went belly up[bankrupt] in the Bunker Hunt[extreme leveraged] run UP.And which gold Company was that that lost a billion or more in hedges , some years ago;i think that was a futures position, also.... Barrick to raise 3 Billion bucks to buy back hedges,older NYT headline[source , just did google].......................................................