Petropavlovsk (UK:POG), weekly – this stock has suffered even more than those of many other gold miners. It has 2 cents per share in cash, and 22 cents per share in debt (note, it has a giant share count compared to CDE: 3.3 bn. shares vs. 137 m. shares) – click to enlarge.
So it’s interesting there has been an epic decline in hedging by the gold miners. Across the sector, the total forward sales of the industry used to be a year worth of production. Now it is three weeks, a drop of almost 95%.
One theory is that this is related to the price. But I don’t buy that. One panelist (if I recall correctly, it was Sean Russo of Noah’s Rule in Australia) noted that the gold basis—the higher price of a futures contract relative to spot—has collapsed.
He said this is important because if you’re thinking of selling forward and you can earn a big 10% premium to sell a few years out, it mitigates the fear of missing out in a big price rally. Is the gold price really expected to rise more than 10% in two years?
Today, if you want to sell one year you will get a premium of about 34 basis points. Two years will net you a whopping 1%*. This is just one more casualty of the Fed’s War on Interest. There may not be much of what people call inflation (i.e. rising prices), but this policy is harming gold miners by making it more expensive to do the right thing, and tempting them to do the wrong thing.
Regular readers know that Monetary Metals does not currently predict a major drop in the price of gold (unlike an earlier panel at the LBMA conference, which seemed to form a consensus around $850). But if your life depended on it — and it does for an indebted gold miner — you would hedge.
*These are gross numbers based on the spread between COMEX futures and spot. In the real world, there are costs and of course credit, and the net result is likely that forward sales are at a loss or discount.
Charts by: StockCharts, BigCharts
Image captions by PT
Monetary Metals and the Perth Mint are sponsoring a seminar in Sydney on Oct 28, to discuss economics and markets, with a focus on how to approach saving, investing, and speculating. Please register here.
Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.
