Accounting Rule Changes for Year 2000greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
The following is from the kitco gold forum at www.kitco.com. What applies to gold applies to must apply to all futures/options/commodity trades. IMO, this would move markets of and by itself. Esp for hedge funds that sell short to profit on falling prices; esp if same hedge funds must cover their exposure quickly.
FASB 133 says that begining January 2000 derivatives must be marked to market for quarterly SEC reporting. A forward sale for a gold miner is just a futures contract paid off in gold. The total amount sold forward must be revalued each quarter with the change being added or subtracted from EARNINGS.
It doesn't matter what year the contract settles!!! The amount short must be valued each quarter. If the price of gold goes up $20 the loss for the quarter is 20 times the **ENTIRE** amount hedged. Not just the amount which settles in the current year.
To pick on Barrick with 15 million ounces hedged a twenty dollar move in gold over a quarter will cost Barrick 300 MILLION in earnings. They earn about 85 million per quarter. If Barricks starts posting losses of 200 million per quarter imagine what that will do to their stock price. GRRR!! BARK! BARK!
Short calls the change in gold price is first multiplied by the options delta. So the farther out of the money the option is the less per ounce earnings will be effected.
The point is that the amount of the hedge shouldn't be compared to reserves but to production. If the amount hedged is more than yearly production it isn't a gold mine whose earnings go up with the price of gold. If the miner is hedged more than one years production it is a hedge fund not a gold miner.
Don't buy gold stocks hedged more than one years production. This means DROOY ABX AU PDG etc. Starting this year 10Q's will have detailed information on hedging. This info will be available to the public on EDGAR for free over the internet.
You have only yourself to blame if you buy a gold stock that is hedged more than one years production. Barricks is the worst if measured by the ratio ( yearly production/amount hedged ) . Don't touch any company with a ratio under 1. Barricks is about .2.
-- Bill P (email@example.com), January 19, 2000
Any idea on which are the least hedged producers? I've been trying to get a handle on this for the past 6 months. There's so much manipulation going on...a lot of silence everywhere.
-- Larry (Rampon@airmail.net), January 20, 2000.
I have not bought gold stocks. Rather prefer physical.
www.kitco.com has a gold discussion forum that reviews thsi info on daily basis.
My purpose for posting this on TB2000 is that I believe the hedging has manipulated gold prices and held them down instead of allowing a normal market price as a leading indicator of Y2K concern/impact. The resulting short positions are huge and must be covered by buying back the short contracts or be selling the mines to counterparties. Either is bullish for gold prices and for mines that have not sold heavy futures.
-- Bill P (firstname.lastname@example.org), January 20, 2000.