Hedging

Week 38.1 Hedging

When I sell 1 oz, I will try to buy back 1 oz from my supplier almost immediately. Most of the time, I will not try to speculate as I tried a few times before and most of the time the end result is not so nice. It is better to have some fixed income rather than gambling all the time.  If you are gambling all the time, over time you will be finished (Customer quote).

However hedging is only possible if you are buying in bulk of few hundred oz. It is impossible to get few hundred oz sales in one shot all the time, most of the time it may take up to 1-2 week to accumulate few hundred oz. Thus, as the seller he will have to make up the losses with a higher sales premium. There is no other way out. Hedging is only possible for big sellers where they can buy and sell in big volume. There is no such thing as exact hedging. One can only do estimated hedging.

How does a middle size seller deal? Well, it based on fine-tuning of their sales based on expected previous week sales. Let said last week sales is 200 oz, so this week you order 220oz so that you have enough for next week sales. If sales are good, order extra the following week. Vice-versa.

How does a small size seller deal? Well, the simplest will be buy at RM100 and sell at RM110. For those who are more experience, they will ask their supplier the replacement cost first before they sell. Once they have a confirm sales of 50 oz, they will lock the price from their supplier for 50oz. They will use their own stockpile for trading.

For minter, normally they will sell their orders in 1000 oz because 1000 oz silver bar is widely available. For example, you order 1000 x 1 oz of sunshine 1 oz bar from sunshine mint, the moment the order is placed, sunshine mint will place a replacement order of 1000oz silver bar from their supplier.  They will make the differences in minting charges.

E.g.  transaction.

Supplier : Well, the minimum order is 200 oz.

You:  If I buy from you, will you accept return for any left-over sales let said 60oz.

Supplier : Orh! The moment you order 200 oz, I placed a replacement order of 200 oz from someone else. You will return me the 60oz I will have to pay you back this will put me in cash tight position. So, the answer is no few years back. But now it’s yes as I can still accept return because I will order 60oz less on my next replacement order from another customer.