Forward Selling - By Gold Producers

For most of the past decade, Gold mining companies gradually changed the way they market their Gold. To an ever-increasing extent, they have "forward sold". The mechanism is quite simple. A Gold mining company with proven reserves in the ground wants to sell a portion of these reserves forward. The company representative goes to a bullion dealer who agrees to pay him, for example, $500 per ounce for Gold to be delivered two years from now. The Gold company has locked in a profit, and on top of that, has the money now for Gold which is still in the ground.

The Gold bullion dealer is exposed, however. He is exposed to a possible loss if the Gold price falls in the future. So, to hedge this position, the bullion dealer sells Gold - for immediate delivery. "Wait a minute" (you cry), where is the bullion dealer to get the Gold to provide for immediate delivery? The answer brings us directly to the second part of the mechanism for maintaining the $US 400 Gold "glass ceiling".