Kitco Gold Forum - FAQ

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GOLD FORUM FAQ

THIS FAQ IS BEING MAINTAINED BY GLENN KAFKA.
ALL COMMENTS AND QUESTIONS SHOULD BE SENT TO auag5@yahoo.com
(Comments are not only welcomed but also encouraged!)


 

Accelerated Supply - The sale of Gold in the market before it is physically produced, by means of mine hedging contracts.

ADP - Acronym for "Alternate Delivery Procedure", a contract delivery method permitting the buyer and the seller, by agreement, to settle their delivery commitments independently of the exchange.

American Style Options - Options which can be exercised at any time during the life of the contract up to the expiry date.

Arbitrage - Riskless (Or assumed to be riskless) profit gained from simultaneously buying and selling the same asset in different markets, or by means of different instruments, in order to exploit price differences (i.e. an inefficiency in the market overall). Arbitrage is often contrasted with speculation, which involves risk-taking. (Note- Long Term Capital Market(LTCM) told there clients that they were making money through Arbitrage but apparently they were not involved with pure Arbitrage. Pure Arbitrage would be buying copper on the LME and selling copper on COMEX)

Asian Style Options - Options which if expiring 'in the money' are settled on the basis of the difference between the strike price and the average price of the underlying asset in a given period prior to expiration.

At The Market - An order to buy or sell at the best price obtainable at the time the order is received. See market order.

Barrier Options - Options where exercise depends upon the underlying price movement during the life of the option and whether prices breach a predetermined barrier level.(Also known as a limit option or trigger option).

Backwardation - Description of a market in which the forward price of gold is lower than the spot price. This rarely happens in gold, but when it does it indicates very high lease rates and a negative forward rate.

Basis - Difference between the spot price and the price of the futures.

Bear Market - A market in which prices are declining.

Bull Market - A market in which prices are rising.

Call Options - Options which give the purchaser the right, but not the obligation, to buy an asset at a pre-determined price, either by or on a set date.

Carrying Charges - Cost of storing a physical commodity over a period of time. Includes insurance and interest on the invested funds as well as other incidental costs.

Cash Market - Market for immediate delivery and payment of commodities.

Clearinghouse - An adjunct to a futures exchange through which transactions executed on the floor of the exchange are settled. Also charged with assuring the proper conduct of delivery procedures and the adequate financing of the trading.

Clearing Member - A member of the clearinghouse or association. All trades of a non-clearing member must be registered and eventually settled through a clearing member.

Contango - Description of a market in which the forward price of a commodity is higher than the spot price. This is a normal situation for the gold market.

Delta - The amount by which the price of an option will change per unit of change in the price of the underlying asset.

Delta Hedge - Action taken by grantors of options to protect exposure. Calculation of the delta hedge takes into account changes in the spot price of the underlying asset, the difference between the spot and strike price, and the time remaining to expiry.

European Option - An option only exercisable on the expiry date.

Exchange for physicals (EFPs) - A technique in which a physical commodity position is traded for a futures position.

Ex-Pit Transaction - Trades executed, for certain technical purposes, in a location other than the regular exchange trading pit.

Exotic Option - The term used to describe options which have special features over and above basic contracts.

First Notice Day - The First date, varying by commodities and exchanges, on which notices of intentions to deliver actual commodities against futures are authorized.

Fee-Based Forward - This permits the producer to sell to a forward date, fixing both the spot price and U.S. interest rate, but floating the gold lease rate. Producers can use this structure to exploit movements in the gold lease rate. For example, if they believe lease rates will be lower on a three-month rolling basis, this structure would fit their requirements better than locking in the lease rate for the life of the hedging transaction. The producer will pay the lease "fee" at the end of each floating period and reset the gold borrowing rate for a further period.

Flat Rate Forward - Forward contracts offering a constant contango thoughout the life of the contract.

Futures Commision Merchant (FCM) - A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of commodities for future delivery on, or subject to, the rules of a futures exchange and who, in connection with such solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. Must be licensed under the Commodity Exchange Act.

Hedge Transaction - A transaction undertaken in order to offset the impact of adverse price movements in the underlying asset.

In the Money - A measure of the intrinsic value of an option e.g. a call option where the strike price is below that of the underlying asset, or a put option where the strike price is above the underlying asset price.

Knock-out Options - Options which are automatically terminated if the underlying asset price reaches a predetermined level during the life of the option.

Local - A floor broker who usually executes trades only for his own account.

Liquidity - The capacity of a market to absorb volume with minimal price movement.

Namaste - Namaste means thank you for you letting me be your teacher, or short Thanks for you listening etc. Some time ago someone defined it properly, I think it's Sanskrit and a way of the gurus to address their disciples after the Satsang (Religious service with the emphasis on teaching ) . Namasté was as usual as "Gidday." Namasté was always said/performed while pressing together ones open hands at chest height with a slight bow of the body, usually eye-contact and a smile. "I see the god in you".
In other words, saying hello to the spirit or soul residing in that physical body. A good reminder for all parties.

Position Limit - The maximum number of contracts, as prescribed by an exchange or the CFTC, either new long or net short, in one futures or in all futures of one commodity combined that may be held or controlled by one person or firm in its name. Does not apply to bona fide hedgers.

PPT - Plunge Protection Team -  This term is used to describe how the Government would come in when the stock market is declining and rescue the markets. The following section was copied from the Washington Post, Sunday, February 23, 1997 "The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for," said a former government official who attended Working Group meetings. "You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do. "In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission.

PPT - A secretive, close-knit cabal of Wall St & Fed/Treasury interests whose primary mission is the manipulation of financial markets with a view to maintaining and extending control over participants in these markets and maximizing returns whether in the form of governmental control and receipts ( i.e. taxable revenue ) or 'trading profits' for Wall St Insiders. The PPT philosophy is the antithesis of the 'Free Market' since said markets are not an end in themselves but exist only as a tool to be used in the furtherance of PPT interests.

Put Options - Options which give the purchaser the right but not the obligation to sell an asset at a predetermined price by or on a set date.

Spot Deferred - A forward contract offering floating interest rates and no fixed delivery date.

Stabilized Contango - A forward contract offered by the Reserve Bank to South Africa's gold mining companies, whereby for a schedule of sales the contango on nearby sales is raised at the expense of a lower contango on more distant sales.

Short Squeeze - A situation in which a lack of supplies tends to force those who have sold to cover their positions by offsetting them in the futures market rather than by delivery.

Strike Price - The predetermined price at which an option may be exercised.

Swap - ( 1 ) Simultaneous purchase and sale of spot against forward, or alternatively
              ( 2 ) the exchange of an asset between two different locations


-------------------------------  Gold Coin Proofs and BU's   -------------------------------

Wanting to learn:

What's the difference in gold coin proofs and BU's. What does each mean? Also, why do American Eagles dated in the 80's, say, 1986, sell for a lot more than 1999's? They're both 1 oz.

The term proof refers to a specific type of stamping for a coin that is done to create a mirror like finish and is only done for a certain number of coins as collectors items. They are made to be beautiful and have a very high reflection and no marks of any kind since they are meant to be collected. Of course a proof can be miss handled and then it will be marked and worth much less but it is still a proof coin just one that was damaged by being touched. A BU or brilliant uncirculated is a condition of a general circulation coin that has been taken out of the mint and never put into circulation. It is the same as all the coins that did go into circulation except it has not been allowed to be damaged by circulating as a regular coin does. It is a state of high brilliance caused by it not being in circulation rather than a special pressing or minting like the proof coin that has a special process to achieve the mirror like finish. The BU is just a normal coin that is Brilliant and Uncirculated BU both can be very rare or rather common depending on the number actually originally created and the condition or the coins and the number of collectors for either type. I hope this helps. Generally the proof coins are more valuable since they are generally rarer but not always.

The reason that bullion coins like the gold eagle vary in price in coin shops is that in addition to the people that buy them as simply bullion in coin form and therefore will only pay the gold price plus a small premium for the convenience of the coin, they also attract some coin collectors. They are so common and have such huge minting runs that it is unlikely that they will ever have any numismatic value but in a world where even toilet paper has been hoarded during my lifetime anything can be collected. Even something that is not likely to increase in value more than the gold value it contains because we are talking mint runs in the tens of millions, but some people still collect them and for them to find the 1980 coins is obviously much harder than the 1999 coins so coin dealers being in the business of making a profit charge more for the scarcer coins. It of course will more than likely be sold at the gold spot price minus a three percent discount when it is sold so unless you think you can definitely find another gold eagle collector you will not be very happy you paid a premium. But like all things in life if it makes you happy to collect these nice shiny coins more power to you. I have bought many of the French twenty franc gold coins from the early eighteen hundreds not because they were any better than any other bullion coin but because they were much prettier and had a nice story to go with them printed under Napoleon and all, still worth only the melt value but hey they are more fun. Our host here sells all kinds of bullion coins from all around the world that can be quite interesting.

----------------------  Calends, Nones and Ides  ----------------------
At the time of their early kings, Roman months were of a length identical to the lunar cycle. Each month was divided into sections that ended on the day of one of the first three phases of the moon: new, first quarter or full. All days were referred to in terms of one of these three moon phase names, Calends, Nones or Ides. At that time a pontifex ( priest ) was assigned to observe the sky. When he first sighted a thin lunar crescent he called out that there was a new moon and declared the next month had started.

1)    For centuries afterward, Romans referred to the first day of each month as Kalendae or Calends from the Latin word calare ( to announce solemnly, to call out ) .

2)    Obviously, the word calendar was derived from this custom.

Day of Calends
     Of the three sections, Calends was the longest it had more days than the other two combined. That's because it spanned more than two lunar phases, starting from the day after full moon and continuing thru its last quarter and waning period, then past the dark new moon until another lunar crescent was sighted. The day of Calends itself began a new month. It was dedicated to Juno, a principal goddess of the Roman Pantheon.

     Unnamed days in the early Roman month were assigned a number by counting down following the day of each named phase, day by day, ending with the next of those three phases. The first numbered day in each section had the section's highest value. Each succeeding day was one number lower than that of the day before. ( Similar to the modern count-down when coordination of a group of people is required for a complicated activity such as launching a rocket. )

     Latin for "the evening before" is "Pridie," a word that was used to refer to the day before each of these named phases. So Pridie was always the day that would otherwise have been numbered two. The count-down was inclusive; the day from which they started as well as that of the moon phase to which they were counting down, day one, were both included.

3)    Nones ( Latin nonus or ninth ) was originally the day when the moon reached its first quarter phase.

4)    When the pontifex initially saw the lunar crescent he noted its width and, using empirical knowledge, calculated the number of days that were expected to elapse between then and the first quarter moon. He then specified that number after he announced the new crescent. If he called out the number six, the day following Calends would be referred to as the sixth day before Nones.

     In any given year, the second day of Martius might well have been designated as the sixth of the Nones of March: "ante diem VI Non. Mart." If this were the case, Nones would be the seventh day and Ides would be the 15th day of that month. The difference between these two dates, eight days, was always the length of the Ides section.

     Use of the word "Nones" ( nine ) was intended to express the inclusive number of elapsed days between first quarter and full moons. Actually, the time between moon phases now averages about 7.4 days, but they sometimes occur eight days apart. Eight-day separations of first quarter and full moons now usually come grouped in consecutive lunations. They then give way to mostly seven-day periods.

     Six of the first seven lunations of 1997, for instance, had their first quarter and full moon phases eight days apart ( inclusive nine-day spans ) . Also, July 1 of 1998 had a first-quarter moon followed by a new moon on July 9, a nine-day period. 5   This helps explain why the unlikely term of Nones, meaning ninth, was used to designate one fourth of the moon's period that now averages about 29.53 days. Ides, dedicated to Jupiter, was originally the time of the full moon. Because a full moon comes halfway thru each lunation, its day was called Idus in Latin from an Etruscan word meaning "divide."

Day of Nones
     After Ides, the next new moon was expected to appear in from 15 to 17 days. Variations in the length of time before another new moon can be sighted is due to constantly changing positions of moon and Earth relative to the sun.

     Romans separated their months from the lunar cycle in the fifth century B.C. Month lengths then became fixed. At that time, Ides was assigned as the 15th day in all months given 31 days in length March, May, July and October. It was designated as the 13th day in all other months. As a result, from then on the Calends section had from 16 to 19 days, the Nones section had either four or six days and the Ides section, as before, always had eight days.

     Sometime after Calends, Nones and Ides were fixed on predetermined days of the month rather than being defined by phases of the moon, Romans used letters A thru H on the left side of each month's calendar column to indicate days of their eight-day marketing week. The first day of each new year was represented by the letter "A."

     It is both unfortunate and ironic that the first Caesar was assassinated on the Ides of March in the year 44 B.C.

     You can see a pre-Julian calendar's first three months at  Early Roman Calendars. That type of calendar was used following the time that months were identical with lunations.

-------------------------------  OTHER USEFUL INFORMATION  -------------------------------

Limit Moves on COMEX------------------
-

Gold
Silver
Copper
-
-
-
$75.00
$1.50
$0.20
In the gold, silver and copper rings, two minutes after either of the two most active delivery months trades at the price limit, or after either of these months is either bid at the upper limit or offered at the lower limit for two minutes without trading, trading in both the futures ring and options ring ceases trading for 15 minutes.

When trading resumes an expanded limit becomes effective. The new limit is 100% the initial price limit. When the market settles that night it will reflect the expanded limits. The market will open the next day close to where it settled the night before. In all cases, trading will not cease if the limits are reached during the final 20 minutes of trading that day. Further, if the limit is reached during the final one-half hour of trading, trading will resume with its expanded limits no later than 10 minutes before the close.

By Glenn Kafka, source COMEX DIVISION Broker Training Workbook
(This is important. Most people believe that after Gold has gone up the limit $75.00 trading stops. But as you can see trading halts for only 15 minutes.)


----------------------  QUESTIONS WHICH NEED ANSWERS TOO!  ----------------------

Where can I get info on Canadian options? Such as PDG and ABX?

What is the relationship between a broker and a clearing firm?

If a clearing firm is a market maker in a security, how does it affect my trades?


-------------------------------  The Gold/Silver Sector Index - XAU  -------------------------------

Is capitalization-weighted and composed of ten widely held companies in the gold and silver mining industry. This index is composed of 10 companies and at the close of business on July 27, 1999 had a total capitalization of $23,398,806,688. (That's 23 Billion for all of them!)

Note 1: Ind Move $1 Change -:- In other words when Newmont moves $1.00 per share, the XAU moves 0.61 points.

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