"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, September 10, 2013

Miners' Hedging back in the News

While reading through some of the newswires stories this AM, I came across an interesting report about Pan American Silver.

You might recall that I had recently written that I believed we were going to see the increased use of hedging among gold and silver miners in order to get themselves some downside price protection and to actually lock in some profits during a period in time of wildly unpredictable price swings in the precious metals.

The story from Down Jones reports comments from CEO Geoff Burns as stating that PAAS had recently instituted hedges in order to reduce risk originating from the wild price swings. Here is his quote:

"Our action may have inadvertently sent the wrong message to the market and to our shareholders about our hedging philosophy and our view of the long-term prospects for silver and gold".

He also stated that he was "considerably more optimistic" about the short term prospects for both metals.

"More importantly, we need to unequivocally reassure our shareholders that the company's fundamental philosophy is still that of not hedging our precious metal production, thereby providing maximum exposure to the price of silver".

The report went on to say that PAAS had entered into forward contracts ( a means of hedging) 20% of its forecasted silver production and 18% of gold production.

They are now delivering the metal and repurchasing in order to close out all of these forward contracts before the end of the current year.

The thing I came away from reading the report is that the company instituted these hedges as part of "a short-term tactical response" to market conditions.

Apparently PAAS feels that the worst of the price decline in the precious metals is over. Remember, this is the thinking of one mining company but I did find it interesting that they were willing to employ some strategic hedging. They are to be commended for that in my opinion as mining companies should not be in the business of losing profits from mining operations. If they can lock in a decent profit on some of their production and mitigate or eliminate that risk, then they are wise to do so.

I would suggest that mining companies do not have the best track record when it comes to the prediction of gold and silver prices. I am of the opinion that any business, whether it be mining, agriculture, etc., that does not take steps to mitigate price risk is taking reckless chances with its shareholders' wealth. It in essence, has become a speculator in its own right. As a speculator, I do not need any mining company I might have chosen to invest in to be speculating on my behalf. I want them to show CONSISTENT and GROWING profits. If hedging is a means to do that, then so be it. I would much rather have a company that misses some upside rather than one that becomes unprofitable and ends up losing money for me. Heck, I can do that easily enough myself as a commodity trader!


  1. PAAS hedged, at what, $20.43 oz., so close to the bottom (so far). Am I naive, or couldn't they have hedged that amount when silver was above $40 oz? It seems that the companies are no more immune to the impulses brought on by greed and fear than the individual investors.

  2. They would have found it impossible to find anybody that would have accepted that price.

  3. This tells you gold is underpriced.


    Soon they will make toilet paper out of the precious metal for the frivolous that want to denigrate the laborious efforts of people unearthing precious metals from 2 miles below the earth surface.

    Hunger games anyone?

  4. GDX charging full speed to the LOD, new lows for the move, while the semiconductor index is flying towards 6-year highs.

    Proof positive that the market is talking, saying that the consumer is fine, there is no "reset" on the horizon, and institutions absolutely abhor mining companies engaged in hedging.

    - Stay in the system.

    - Invest in the leading growth sectors only.

    - Believe the price action on the tape.

    - There will be a time for GDX, but not today, maybe later on this month.

  5. I personally will continue to short the miners into resistance areas as a hedge against my long term gold position.

    Also, this is not a personal attack, but if Turk, Sinclair, Schiff, Embry, Egon, etc., could keep their traps shut every time gold has a sizable rally proclaiming that the long term bottom is in, maybe gold will then have a chance at a huge sustainable rally.
    Excluding Dan N. and Pierre Lassonde, both of whom I respect, King World News is an outstanding contrary indicator for US stocks and the metals.

    1. Tom Haan; So good to hear you point out what I have said for years, and of course I could make your list longer, but hey, I think everyone gets it by now. The kind of guys that are worth listening to are the self deprecationg ones like Rogers, Faber, Zulauf, who never run off at the mouth like the hash slinging clowns previously mentioned. I think Yamada is right that this is just a bear mkt rally in gold, silver and platinum and I stand aside; staying short beans and Yen and that is all; oh, by the way, people forget that in times of strife and war, the first casualty is the truth; steve in sparks; it is all a pipeline issue, with Iran/Russia vs. Qatar/Saudi the other side

  6. As long as they don't hedge out more than one year, i am ok with that. PAAS hedging at $20 is suspicious if that is true. They have always been covertly part of the cartel.

    Looking at the big picture, virtually all of the precious metals companies themselves colluded in the suppression of the gold and silver prices with their years or decades of silence. The hedging or non hedging doesn't make me like them any more one way or another.

    1. I always wondered if there's more than a few Swiss accounts filling up to get some of the players involved to keep their traps shut

    2. @prioris here is the note on hedging from PAAS's Q2 report:
      Due to the sharp decline in precious metals prices, the Company evaluated alternatives to mitigate the financial risk of further price erosion and decided to protect a portion of its future precious metals production associated with its higher-cost Peruvian and Argentine operations. Subsequent to the end of the current quarter, Pan American entered into forward contracts of up to 12 months for a maximum of 25% of its forecast precious metals production. To date, Pan American has 5.3 million ounces of silver and 24,000 ounces of gold under contract, at average prices of $20.43 per ounce of silver and $1,323 per ounce of gold, which will settle monthly between August 2013 and June 2014.

    3. behind the scenes, a lot of scheming is taking place to loot small investors. i wouldn't doubt swiss accounts are some part of it.

  7. Focus on what's going on FOMC next week and debt limit soon after. Bottom line Gold long term is cheap, these rapid moves are FED BB backed in support of FIAT and just par for the course. Anyone who wants to invest in mainstream stocks fine but subtract the inflation from the bottom line, check Dow and S&Ps over the last decade this bear has a long way to go it will bottom at Gold to DOW 1:1. Then overlay DOW S&P500 with Gold GDX over last couple of years, which has more upside, buy low sell high, I rest my case. As Richard Russell mentioned recently JPM is holding a lot of Gold and he doesn't want the DOW at these levels.

    1. Who cares what these markets have done over the last decade. I'm only interested in what prices will be moving forward. And sorry, Richard Russell is probably a good guy, but he's a clown regarding markets.
      I believe that you're absolutely wrong about US stocks, as they are in a huge bull market. I do agree that they are quite overbought and I certainly wouldn't be establishing long term positions here on the long side.
      It appears that you have drunk the gold bug's Kool-Aid.
      Just be humble and let the market speak to you. Your bias will get you in trouble.
      Not being nasty, just my thoughts

    2. Your welcome to your thoughts possibly better expressed on many of the MSM forums. Your need to resort to playing the Gold bug line says it all. I suggest stick to the facts of the subject not the labeling of participants. Instead of telling me I have drunk this or that Kool-Aid just stick to why you think are particular market is doing this or that. Is FOMC next week and the debt limit relevant to Gold prices going forward, if not please tell us why.

    3. First of all, it was not a personal attack as I stated. That's not polite. Secondly, I don't even know wtf an MSM forum is.
      I don't care about FOMC. I don't care about debt limit. I'm a trader/investor. I only care about "market action". I don't parrot what other experts say. I only care when my work tells me to enter and exit markets.
      It took me years to learn. I highly recommend learning how markets operate before putting down another dime. Best of luck.

    4. You've missed my point completely, I suggest concentrate on your trading. Good luck.

  8. http://s15.postimg.org/x1hnju4iz/gld.jpg

    Finally bought a bit more yesterday at 1360, because we bounced on 1357 which is really very very close to the green support channel going upwards. The ma20 is still straight and // to the green channel, so I'll stick to my strategy.
    Bol inf is also going up near 1350 now.
    median of the pitchfork on the 2day candle chart is at 1356 = support.

    But there are headwinds, so I'm not very confident about anything : I put my stop loss above, from 1335 to just below 1350. Never mind if I'm stopped, I'll lose around 10 points, it's not huge but I'm taking a risk here. On the other hand, if prices reverse back up, I hope we'll see again the recent highs.

  9. Hi Dan,

    I understand that your thinking is that the long term bottom is in for the gold and silver markets [as per your reply to, Hubert Du Haut]; My question is- how does one determine whether the long term bottom is in as oppose to this most recent bounce off the recent lows just being a bear market rally?

    1. To be more specific on the above question, is your thinking based on some technical indicators or picture; strengthening fundamentals, anticipated outcome from the FOMC meeeting, etc etc?

      Thanks Dan!

  10. lol, thanks for the link to Mish website :)


    - Obama backed down from his John Wayne McCain guns-a-blazing approach to "I have, therefore, asked the leaders of Congress to postpone a vote to authorize the use of force while we pursue this diplomatic path."

    Mish Translation "God damn it! I don't have the votes"


    ok so I'm still in the bull train, reinforced at 1360, stop loss under 1350 and target 1470 yeehoo. I'm a believer....of risk rewards ratios :)

  11. I make the over/under on Heinz Kerry's firing 30 days; steve in sparks

  12. I strongly suspect gold will not turn up at the uptrend support.

  13. GDX/GLD ratio now at .20

    All time record low was .19

    A turn should be coming soon.

  14. Good points rlm. You know the Dow components get a makeover every year or so too- the underperformers are removed, and newfangled, "upstart" money generators take their place. And the inflation policy at the Fed reanimates the artificial limbs as long as the Fed steroid binge, Wall St. promoters and doting press captivates fans: http://money.msn.com/bill-fleckenstein/post--is-the-end-of-an-error-coming-soon September 6, 2013

  15. rlm- Just happened upon Jesse's newest, on similar issues:

    SP 500 and NDX Futures Daily Charts - Are Expectations of a September Taper Fading

    "Another glorious rally as the Pax Americana proves to be irresistible.

    Stocks are getting a bit stretched, and the volumes are almost a joke. So this has the appearance of puffery.

    But even puffery has its day, as the illuminaries and solons of Washington can attest.

    Someone asked if I am hedging precious metals by shorting stocks and the answer is 'absolutely not.'

    There is no need to hedge at this point, and stocks are in an almost pure technical trade...

    I wanted to go to a room and quietly weep for the pitiable demise of the Dow Theory today. With the inclusion of Goldman and Visa in the Dow Jones Industrial Average, it can be considered officially gone, death by cynicism...

    If they could add the Congress to the DJIA it would be a coup de grâce for the real economy..."


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