Joltin,

I am sitting in a hotel room, bored, and thus am glad you have come out to debate issues.

/We all know of Barricks mistake trying to lock in a price against future production but that was a mistaken prediction. If the gold price had gone down they would have been heroe's./

Barrick's initial prediction on the price direction of gold was not mistaken. In fact it was bang on. There initial shorting program was very successful and held up as the model to other mines on how to finance there new operations and even as a way to increase their opperating revenue.

I call their program a shorting program rather than a hedge because unless you actually take the other side of the trade to offset your short position , you have not hedged anything. A proper hedge in Barricks case then would have been to retain 1 ounce of gold for every ounce they sold short. If they had done this then they would not be in the mess they are today.

The effect of Barricks initial shorting success and pressure by the bankers to have companies finance their new projects with some sort of supposed hedge program. Ensured that many gold miners adopted some form of hedge program ( gold shorting) even if they did not want to. Higher cost producers were forced to hedge in many cases just in order to stay in business. They essentially produced gold for zero profit.

This of course drove away most investors from investing in the gold industry making sure that any new project would be financed by a banker, who then immediately asked for a hedge program to be put in place.

These bankers were either incredibly stupid or had an alterior motive, nobody would force a gold company to sell future production thus depressing the present spot price and the companies ability to make profit and repay its debt.

What Barrick was mistaken on is that they could continually short gold by selling future production while receiving a price substantially above production costs.

Then again they probably never thought this either. In a recent law suit filed against them they have pleaded not guilty to gold market manipulation because they were acting as agents of the governement. Thus the company and its officers are immune from prosecution. See that new law is being used already.

/What about the farmer who sells crops in the futures mkt. to guarantee himself a living standard? What about a Cdn. co. or individual who protects themselves against currency loss by dealing in currency futures? Am I correct in assuming you think these mkt's. should not exist?/

While certain futures markets are more legitimate then the bullion market since the product they trade in are eventually asked for delivery upon and thus the supply demand equilibrium in the longer term is able to take effect. This does not mean that they are free from short term corruption by any means.

The futures market is a pricing mechanism for an underlying commodity whose price than can be arbitrarily set in the short term by market participants who have no intention of asking for delivery or even know the industry. These market participants can manipulate the price of real commodites in the same way a stock is manipulated.

The consequences of this can be far more dire than that of stock market manipulation because while a stock will eventually reach its fundimental value given enough time. Once a participant has locked in a future trade with the purpose of taking delivery he is stuck with this price. A price that may not be reflective of the actual supply demand equation. This can have a serious impact on the companies profitability and future viability.

In the case of your farmer who sells his crop in the market to guarentee himself a certain price and thus hopefully profitability. The price he gets may not be indicative of the actual market conditions. This may lead him to plant a crop or take some other course of action that is not in his best interest in the longer term.

Markets work best when they are free and the market participants in any type of trade are able to discover the price themselves through supply demand fundimentals.

This leads to a stable market where resources and effort can be redirected as needed ensuring profitability for those well run operations and a fair price to the consumer.

When future markets were first established in the US back around 1900 they were opposed. The prosecutors claimed they were nothing but gambling and in violation of the US gaming laws.

I agree with that assessment and what little good they accomplish does not offset the harm they do. They accomplish nothing that freemarket price discovery would not discover for its self in due course.

In effect then I am stating that yes, futures markets should never have been aloud to come into existance. Just as shorting should never have been aloud to come into existance either.

Regards,

F.F.