2x Gold Exposure Without Leverage?

Today was the first Rotman stock pitch competition where the second year students gave the first years a chance to practice their skills in valuing and pitching companies. It was an interesting experience for all of us and there were many lessons learned.

In talking to other people doing pitches for companies in different industries, there was a lot of learning between groups. I though I would write about some of the more interesting lessons.

This post is focused on gold (or mining exposure to raw materials). Gold and copper have very important attributes and characteristics which are highly correlated to the health and confidence of the economy, especially as it relates to Canada. As a result, most portfolios will have some exposure in these areas depending on the strategy. Gold is often used as a hedge against inflation, but copper is associated as a leading indicator for the health of the economy.

However, in order to make larger hedges in the market based on these commodities, portfolios will utilize instruments which promise 2x exposure to these materials. When I first heard this, I asked, "How is it possible to have 2x exposure without employing some form of leverage?"

As Shree explained to me, this is how it works:
Imagine gold is selling for $1000 per ounce.
Imagine a company can mine gold for $500 per ounce.
It's profit is $500 per ounce (and let's exclude all other costs for now, or assume that the $500 per ounce includes all expenses).

Now imagine gold rises in price to $1100 per ounce.
The company can still mine it for $500 per ounce.
The profit is now $600.

Gold has only gone up 10%, but the companies earnings have gone up 20%! It's a 2x exposure without any leverage.