Gold News (?)

[renewable]

Re: Gold News (?)

Was looking into Oliphant, Barrick & hedging and came across this NYT article from 2002: http://www.nytimes.com/2002/01/24/bu...l?pagewanted=1

In one common hedging strategy, commercial banks, on behalf of producers, sell gold borrowed from central banks to lock in the current price and then invest the proceeds in government securities.

I had thought that the commercial banks selling central bank gold was an unproven theory, yet here is the NYT describing it as 'common' :confused:

[ThePythonicCow]

Re: Gold News (?)

Since then Mr. Oilphant has resigned as president of Barrick.

Aha. From the Barrick corporate website, at http://www.barrick.com/Company/Corpo...s/default.aspx :

Aaron Regent
Toronto, Ontario
President and CEO, Barrick Gold Corporation
Mr. Regent was appointed President and CEO of Barrick Gold Corporation effective January 16, 2009. Before joining Barrick, he was Senior Managing Partner of Brookfield Asset Management and Co-CEO of its Infrastructure group. Mr. Regent previously served as President and Chief Executive Officer of global mining company Falconbridge Ltd. from 2002-2005.

I guess it did not go so well for Mr. Oilphant in his talks with the board.

[ThePythonicCow]

Re: Gold News (?)

I had thought that the commercial banks selling central bank gold was an unproven theory, yet here is the NYT describing it as 'common' :confused:

That some central banks lease gold at very low rates to certain banks is a public fact, at least in my understanding.

Ah - yes. Here from the Federal Reserve site itself, at http://www.federalreserve.gov/boardd...8/19980724.htm

Testimony of Chairman Alan Greenspan
The regulation of OTC derivatives
Before the Committee on Banking and Financial Services, U.S. House of Representatives
July 24, 1998

Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.

[renewable]

Re: Gold News (?)

I would guess that Barrick wasn't trying to cap the price of gold, but rather (if playing it straight up, contrary to my speculations above) trying to ensure a minimum price for their future gold production, to avoid the risk of mining gold for more than they could then get for that gold in the market.
But isn't Barrick closing these forward contracts by delivering gold, not dollars, according to my quote of Mega's article above? They recognize a $1.9 Billion loss this quarter to cover the little problem that buying $1000 gold to cover future production previously valued on their books at $377/ounce will be a pain in their balance sheet.

Barrick has an interesting history (even their name!). The hedges seem to go back to the founder, Munck - who GATA really don't like. Bit of history of Barrick: http://www.safehaven.com/article-5689.htm

Apologies - I initially just skim read the article. It looks like, as you say, they must deliver physical to settle, and cannot just buy futures with paper. Heh.

[renewable]

Re: Gold News (?)

That some central banks lease gold at very low rates to certain banks is a public fact, at least in my understanding.

Ah - yes. Here from the Federal Reserve site itself, at http://www.federalreserve.gov/boardd...8/19980724.htm

Greenspan is talking about something that may be necessary. I'm surprised that it was described as 'common' in a respected newspaper. The NYT makes it sound that a great deal of central bank gold has been sold, which isn't generally publicly accepted.

[Zorro]

Re: Gold News (?)

I thought that in this world at least, "hedge" and "selling forward future production at fixed price" were roughly synonymous. However I am a rather newbie goldbug, so quite possibly confused.

If you forward sell by contract, you promise to deliver on a given date at a given price.
How can this be considered a hedge?
It is a sale.
A hedge is a means of preventing future pricing from adversely affecting a desired profit from the sale.

[ThePythonicCow]

Re: Gold News (?)

If you forward sell by contract, you promise to deliver on a given date at a given price.
How can this be considered a hedge?
It is a sale.
A hedge is a means of preventing future pricing from adversely affecting a desired profit from the sale.

If you read that Barrick article, they call these transactions hedges, and describe them as forward contracts.

If you read http://en.wikipedia.org/wiki/Hedge_%28finance%29, it describes a hedge as follows and includes "forward contracts" as one kind of hedge:

In finance, a hedge is a position established in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market with the goal of minimizing one's exposure to unwanted risk. There are many specific financial vehicles to accomplish this, including insurance policies, forward contracts, swaps, options, many types of over-the-counter and derivative products, and perhaps most popularly, futures contracts.

[ThePythonicCow]

Re: Gold News (?)

If you forward sell by contract, you promise to deliver on a given date at a given price.
How can this be considered a hedge?
It is a sale.
A hedge is a means of preventing future pricing from adversely affecting a desired profit from the sale.

On the other hand (I'm practicing to become an economist ;)) the following quote comes from the http://www.safehaven.com/article-5689.htm link that renewable posted above:

As a shareholder I was concerned about Barrick's preposterous ideas on hedging. Munk was fond of using innovative financing techniques and Barrick boasted that its credit standing is second to none, due to its unique hedging policy. I realized that the word 'hedging' as used by Barrick was a misnomer. It is not hedging at all, any more than a shill is winner at the poker table. The appearance is that she is winning big; in fact she has to surrender every cent of those gains to the casino owner at the end of the day. Barrick was simply selling its production forward, at one point as far as five years out as measured by current output, with settlement postponed, at the option of the 'hedger', for as long as fifteen years.

[ThePythonicCow]

Re: Gold News (?)

Barrick has an interesting history (even their name!). The hedges seem to go back to the founder, Munck - who GATA really don't like. Bit of history of Barrick: http://www.safehaven.com/article-5689.htm

That's a delightful article. Thanks for the link. It nicely foretold todays news, three years ahead of time:

But since Barrick had an established policy of selling forward, and never buying forward, speculators would abandon the long side of the market in droves. They would move to the short side en bloc, in trying to forestall Barrick. They would want to sell first. Under these circumstances the chips could no longer fall where they may. Fall they did alright, together with gold. The gold price was effectively capped. Worse still was the long-term effect. Just as you cannot 'cap' an active volcano, you can't cap the gold price forever either. It is bound to erupt and, when it does, you can kiss good-bye to the Principle of Mean Reversal. In the end Barrick could be saddled with a king-size liability (Yup - $1.9 Billion and counting) that it may never be able to live down.

[ThePythonicCow]

Re: Gold News (?)

Barrick has an interesting history (even their name!). The hedges seem to go back to the founder, Munck - who GATA really don't like. Bit of history of Barrick: http://www.safehaven.com/article-5689.htm

There is even more good stuff in that article. The section beginning with "Is Barrick a front to cover up gold-laundering?" is consistent with my speculation above that Barrick is part of the oil for {dollars, gold and guns} trade between the U.S. and Saudi Arabia:

The suspicion that Barrick is a front to cover up a gigantic gold-laundering operation, presumably on behalf of a government (or governments) that need more time to complete a gold-acquisition program in the order of thousands of tons of gold, is hard to escape.

Perhaps Saudi Arabia is that gold collector. I can well imagine that an Arab prince would prefer payment in gold to payment in western fiat currency. Perhaps Saudi Arabia will soon be completing its gold-acquisition program, courtesy of gold delivered to it that was paid for with the proceeds of this latest offering from Barrick.

Step by step, we are watching a great unwinding.

[ThePythonicCow]

Re: Gold News (?)

In related news at http://news.moneycentral.msn.com/tic...08&id=10371491, Silver Wheaton has agreed to pay [Barrick] $625 million in cash over three years [$212.5 million initially].

On the original Barrick news of this thread, there is a more detailed news article and press release at http://news.moneycentral.msn.com/pro...08&id=10372575 .

Note from this article that this is a bought deal, meaning that RBC Capital Markets, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and Scotia Capital Inc have already committed to pay Barrick the $3 million from the offering. The money is "in the bank" for Barrick.

The Silverton deal above is also a "bought deal", meaning that Silverton's $212.5 million payment to Barrick later this month (Sept 2009) is also "in the bank."

This means that Barrick will be in the market for up to $3.2 billion worth of gold very soon, over the next 12 months in the words of the above release:

Within the next 12 months, Barrick expects that, on an opportunistic basis, it will purchase these ounces in the open market and/or deliver gold from its own production in a manner which will seek to minimize the cost of settlement.

[*T*]

Re: Gold News (?)

If you forward sell by contract, you promise to deliver on a given date at a given price.
How can this be considered a hedge?
It is a sale.
A hedge is a means of preventing future pricing from adversely affecting a desired profit from the sale.

So, it's almost the definition of a hedge.

Barrick, with mines full of gold, are naturally very long gold.
Barrick were simply selling forward their production , locking in what they thought was a favourable price. They are then less long gold.

[GRG55]

Re: Gold News (?)

GRG55, RBC just sent me an email announcing its participation in the IPO, and an extension to its online trading customers to participate.



Looks like it's $3 off today's (USD) price. I was looking at Barrick's (CAD) stock trend:
http://www.google.ca/finance?client=ob&q=TSE:ABX
(select 1Y or 5Y)

It didn't look that impressive considering it's so high based on historic trend. It also sounded pretty strange (to me) that it's being underwritten in part by JP Morgan - one of the biggest PM shorters out there. Is it just another branch of JP that's doing this (left hand not talking to right hand), or is this part of a bigger scheme for 'POOM' in gold?

Adeptus

With the fall in energy prices since last summer the gold miners should be enjoying a bit of reprieve on the cost front. My concern continues to be what happens to their margins if/when energy becomes "expensive" again - will bullion outrun the rate of increase of input costs? For the most part the miners have underperformed the run in gold bullion itself since this bull market in the metal began early this decade.

Apparently Jim Sinclair expects the best of the mining companies [especially the juniors] to eventually perform once the demand for gold starts to create problems with the ability of the market to supply physical. He also thinks Barrick is going to be "the consolidator" in this sector in the next M&A cycle...

[renewable]

Re: Gold News (?)

More on Barrick & hedging: http://jessescrossroadscafe.blogspot...pitulates.html

Barrick Gold and their bullion bank partner J.P. Morgan were the target of lawsuits by the gold bulls, most recently Blanchard and Company, for price manipulation through the use of forward sales in their hedge book. The contention was that the selling was being used to manipulate the price of gold.

Barrick's initial defense was that if they were acting in conjunction with the central banks, they were therefore immune from prosecution since the central banks are immune from prosecution. Details of that story are here. The public document that Blanchard had put forward was shocking in its implications indeed, and can be seen here.

Almost as shocking as the complete lack of interest and follow up in such a potential scandal by the financial community, market regulators, and the media.

One has to wonder what Barrick's management now sees in the precious metal markets, in order to accept this significant shareholder dilution to take down those fixed price contracts now.

[rjwjr]

Re: Gold News (?)

There is even more good stuff in that article. The section beginning with "Is Barrick a front to cover up gold-laundering?" is consistent with my speculation above that Barrick is part of the oil for {dollars, gold and guns} trade between the U.S. and Saudi Arabia:
Perhaps Saudi Arabia is that gold collector. I can well imagine that an Arab prince would prefer payment in gold to payment in western fiat currency. Perhaps Saudi Arabia will soon be completing its gold-acquisition program, courtesy of gold delivered to it that was paid for with the proceeds of this latest offering from Barrick.

Step by step, we are watching a great unwinding.

I don't subscribe to your conspiracy theory, Cow, but I like you so I thought I'd add some potential fuel to your fire...

http://arabianmoney.net/2009/04/23/d...acility-opens/

Dubai gold storage facility opens

The new gold vaults under the headquarters of the Dubai Multi Commodities Centre will open on Sunday as the City of Gold ups its bid as a regional centre for the burgeoning investment interest in the yellow metal.