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Gold
Demand
1. Jewelry (80%)
2. Commercial and
Industrial use
3. Back-up for currencies
Supply
1. Expanding Production
Soviet Union
South Africa
North America
Australia
2. Central Banks
Liquidation
Long-term trend?
Cons
1. Protect downside
1. Sacrifice Upside
2. Share price premium?
2. Unsystematic risk?
3. Specialize in gold production 3.Share price penalty?
not gold risk taking
4. High operating leverage
and high sunk costs
5. Limited ability to adjust production
6. Lock-in the low total costs (see exhibit 3)
2. Forward Sales
Normal forward contract
FT = S (1 + i)T
Gold forward contract
FT = S (1 + i - g)T = S (1 + c)T
where c = i - g
c = contango rate
i = dollar interest rate
g = gold lease rate
See exhibit 11
The main disadvantages
1. Option contracts of maturities longer than 5 years
unavailable
2. Market was illiquid for maturities longer than 2 years.