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Blog : Soaring Gold Prices
November 6th, 2009
This week, the Central Bank of India purchased an unprecedented 200 tons of gold from the International Monetary Fund. Today, gold prices broke through the $1,100 per ounce barrier for the first time in history.
Whether we're in for more upside remains to be seen, and there are certainly very logical arguments on both sides of the debate. The gold experts I follow and trust are suggesting that the price of the commodity will continue even higher from here, but perhaps at a more guarded pace.
With prices of the metal so high, logic dictates that the penny stocks which produce it should be doing very well. However, this is not necessarity the case. Many of the smaller (and just about all of the bigger) production companies hedge their supply against future price volatility.
In other words, they pre-sell a certain level of production at a certain price. It's a legal commitment to sell X tons for X dollars (for example), within an agreed upon timeframe.
Hedging helps when prices trend lower, but it ends up costing the companies when gold prices soar. If a company commits to sell gold at $800 per ounce to the buyer, then gold prices soar to $1,100, they are making a lot less than they otherwise would have if they hadn't hedged.
Of course, hedging future sales helps the company tremendously if the price of gold falls below the agreed upon level. Selling at $800 per ounce when the price of the metal sinks to $600 makes the corporation look pretty smart.
Hedging is also a way cash-strapped penny stocks can generate revenue earlier, or at a consistant rate, making operations less volatile and more predictable.
The way to play the high gold prices is to look for penny stocks that are operationally profitably, minimally hedged, if at all, and with operational mines that have a Reserve Life Index (RLI) of many years.
We are currently looking into just such companies, and if they pass Leeds Analysis, expect to see them featured on our Hot List in the future.