Profitable trading at yesterday’s price

Over the years, a certain sizeable mining-refining company had acquired increased central control of virtually every function of the complex and successful corporation. Then along came the vigorous Young Turks who had received the go-ahead re-organize the main office.

These earnest young men — no women then — were MBA-types who had only a smattering of the world of mining and electrical engineering, geology, metallurgy and marketing.

It is certain they were not students of the eminent Petronius Arbiter who said, more than 1,900 years ago, “No sooner had we got things together and running smoothly than it was decided to re-organize us.” We might say, “If it ain’t broke, don’t fix it.”

In the name of cost-cutting and efficiency, targets were identified and marketing was one of the bull’s- eyes. The administrators’ perceptions (misguided, of course) were that marketing of metal from the mines did not require so many experienced trading personnel. Decline under way

The demobilization continued inexorably, like the circular blade slicing ham until nothing was left. The MBAs’ reputations soared. Few people could see that the company’s decline began because of such ineptitude.

The perceived “minor” function of marketing was shoved on to the poor accountants who were already immersed in a myriad of financial and tax compliance duties.

Now, as you know, for everything you get in life you have to pay a price. The heavy price was that they lacked the knowledge of how markets work and so committed classic trading and timing errors, costing the firm a steady hemorrhage of money over a long period.

Their accounting wisdom resulted in their offering a certain amount of metals for sale each trading day to certain professional traders, not all of whom were in a position to buy every day.

I was. An oral telephoned contract supported by the normal traders’ chicken scratches was legal and binding. In our legal tradition, a contract existed if there was an offer and an acceptance, usually supported by consideration, that is, a promise, act or price that induced one to enter into the contract.

One price was like another to those accountants as long as it was market-decided, like the “closing” price on the previous trading day, a rule to which they clung faithfully. Well, cling together and you’ll clang together. Price tendencies ignored

This cramped concept automatically shut out any study of the market price tendencies in the day they were in. To paraphrase an old saying, they knew the value of everything but the price of nothing. Price is value expressed in terms of money. Market price is the price found in a given market at a given time.

So, to oversimplify this story, each day they were offering me metal, I had my finger on the metals markets’ pulse in London, usually five hours ahead of us, and later in the morning I had the early New York and Chicago prices.

The accountants were always happy to sell at yesterday’s price, that is, that of the previous trading day’s close. Of course, I only bought those large amounts of metals at that level if the today’s price was higher. When the today’s price was lower than yesterday’s, I did not buy. They did not seem to mind and I still cannot believe it myself.

This story is a part of the history of metals, an unbelievable period. So is the sad decline of that once prominent mining company. Add it to the long list of how not to run a minerals industry firm.

Nowadays, most mining accountants have a much better comprehension of these vital trading matters, but not all of them. I am still staggered by the misconceptions that some have.005 T. P. (Tom) Mohide, a former president of the Winnipeg Commodity Exchange, served as a director of mining resources with the Ontario Ministry of Natural Resources until his retirement in 1986.

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