Gold News (?)

[Mega]

What does this mean:-
http://www.globeinvestor.com/servlet...805_1/GIStory/

Mike

[jpatter666]

Re: Gold News (?)

Looks like they believe gold is heading significantly higher and are putting their money down on it.

--------------------
Barrick has made this strategic decision to gain full leverage to the gold price on all future production due to:


- an increasingly positive outlook on the gold price. The Company expects global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies; and
- continuing robust gold supply/demand fundamentals.

[Adeptus]

Re: Gold News (?)

What does this mean:-
http://www.globeinvestor.com/servlet...805_1/GIStory/
Mike

I for one, couldn't really understand the article until I googled 'What is Gold hedging'... where I found this wonderful article:

Excerpt from : http://www.zealllc.com/2002/goldstk101.htm

Hedging, in the gold stock world, has evolved into something more closely resembling pure speculation as retired Swiss banker Ferdinand Lips documents in his awesome new book “Gold Wars”. A good thing in theory has been transformed today into a nightmare of a mess for some gold mining companies.

Gold hedging, in its most basic sense, is simply the contractually locking-in of a price today to be paid later in the future when gold is actually produced. A hedging gold mine makes private deals with bankers to sell the gold it will mine in the future at a fixed price regardless of whether the actual gold price in the future turns out to be higher or lower than the agreed upon contractual price.

Originally, gold hedging was the legitimate pursuit by gold mine managers of protecting a small portion of their cashflows to ensure their operations would survive without interruption if there was an unforeseen gold price drop. By hedging on the order of 10% of their total annual production, gold mines could ensure in a worst-case scenario that they would have sufficient cashflows to pay operating expenses through lean times.

Unfortunately today, gold hedging has ballooned far beyond a legitimate business practice and far beyond speculation into naked Vegas-style gambling. A speculator is someone who takes large risks to make a bet on a future price in the hopes of large rewards. Speculation is ultimately little more than professional gambling.

Wall Street bankers chasing fat profits for themselves, gold stock shareholders be damned, have seduced most of today’s hedger gold companies into making enormous bets that the gold price is going to fall forever. What lunacy! No price moves in one direction forever! Yet some of today’s major gold mines hedge an incredible 300%+ (multi-years) of their total annual gold production, a stupendously large bet!

While a 10% of annual production hedge may be a legitimate business transaction, a 300%+ of annual production hedge is nothing more than pure gambling. I call any gold mine that in total has the equivalent of over 100% of its annual production hedged a “mega-hedger”. All gold stock investors should avoid the mega-hedgers like the Black Death! Hedging kills profits and robs shareholders. It is exceedingly dangerous and yet remains widely practiced today.

Hedging is such a huge problem because hedging kills leverage. Using our HighCost example from above, imagine if HighCost’s management had sold 100% of its future gold through hedges at a fixed price of $300 per ounce when gold was only $275.

Initially, the hedging may have looked intelligent, because HighCost locked in future gold prices higher than today’s. But, as gold begins to rally, massive problems arise. When gold crosses $300, HighCost’s profits can no longer rise because it has a private deal with bankers to sell its gold at a contractually-fixed $300 price. At $350 gold, each HighCost ounce of gold mined carries a huge $50 opportunity cost. HighCost can only sell an ounce of gold at $300 per its hedging contracts, but the market price of gold is $50 higher.

If HighCost was aggressively hedging, its shareholders’ profits will be slashed by 2/3 using our example above! Instead of HighCost’s profits and stock price soaring up by 1500% in a 27% gold rally, they would top off at 500% regardless of how high gold runs. Investors begin hemorrhaging potential returns they are entitled to at the $300 hedge price. All profits after that are effectively stolen from shareholders and handed to bankers. The higher the gold price goes, the worse the situation becomes for hedged gold mines. Shareholder losses begin to grow exponentially as the gold price marches higher.

The glorious gold mine leverage described up above is effectively assassinated by gold mine managers who stoop to aggressive “hedging” (read gambling) practices.

Amazingly enough, if gold mines are particularly aggressive hedgers a rapid spike in the price of gold can actually push them into bankruptcy! There is something very wrong with a gold mine if higher gold prices, which should help it, actually prove lethal due to the complex and unpredictable derivatives hedging contracts.

...

Adeptus

[MulaMan]

Re: Gold News (?)

It has been speculated that Barrick is a key channel for wall street to manipulate gold prices - so this could be anything from Barrick covering thier naked gold shorts before the tide goes out a pump and dump scheme to get suckers into gold and then pushing it back down to 880.

[renewable]

Re: Gold News (?)

I subscribe to the theory that forward selling by Barrick was probably part of an attempt to slow or cap the POG. They're going to be using this $3 billion to buy back their hedges; should be very positive for the price as, from the OP, Barrick will be buying back nearly 10 million ounces.

[GRG55]

Re: Gold News (?)

It has been speculated that Barrick is a key channel for wall street to manipulate gold prices - so this could be anything from Barrick covering thier naked gold shorts before the tide goes out a pump and dump scheme to get suckers into gold and then pushing it back down to 880.

"Naked" gold shorts?

One of the world's largest gold producers with "naked" gold shorts. Ya right...

[ThePythonicCow]

Re: Gold News (?)

Holy Cow!

I have another, darker theory. Pure tin (er eh gold) foil hat stuff.

I suggest that Saudi Arabia has been a major recipient of these gold future contracts over the last few decades, as partial payment for their oil. They would have liked gold directly, but were willing to take instead future gold mine production. Barrick (ABX) was a major provider of this production. Hat tip to off-the-wall weirdo speculator "another", whose strange thoughts from a decade ago can be read at http://www.usagold.com/goldtrail/archives/another1.html, for this much of my speculation.

I further suggest that Saudi Arabia has now insisted that these contracts be pulled forward. They want their gold now.

From Mega's linked article:

Barrick's Gold Hedges consisted of 3.0 million ounces of fixed price contracts where Barrick does not participate in gold price movements. These contracts have a negative MTM position of $1.9 billion as of September 7, 2009. Under the terms of the Gold Hedges, Barrick could purchase gold in the open market or deliver physical gold into these contracts in order to terminate them. 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.

This will put a squeeze on gold available for trade, and cram up gold prices.

Then it will leave Saudi Arabia less entangled with the U.S. for its oil business.

Once Saudi Arabia signs up some other rent-a-cop besides the U.S. military, I predict they are out-a-here. That will be the last penny that drops, confirming to even the obtuse that things are no longer as they were.

Thanks for the link, Mega. This post was some of the most fun I've had ... in at least the last twenty minutes .

[ThePythonicCow]

Re: Gold News (?)

Let's calculate here: $1900 million negative position on 3 million ounces. That's $633 in the hole on each ounce. Barrick wrote those contracts for about $1000 - $633 = $367 per ounce. I'm glad I'm not the CEO of Barrick having to explain that one to my board today.

[ThePythonicCow]

Re: Gold News (?)

Also from Mega's article:

For 2010, Barrick expects production to grow to 7.7-8.1 million ounces at lower total cash costs than 2009.

Miners are notorious for projecting increased production just before stock offerings. I trust the governments economic forecasts more than I trust Barrick here.

[Adeptus]

Re: Gold News (?)

"Naked" gold shorts?

One of the world's largest gold producers with "naked" gold shorts. Ya right...

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

Barrick Gold Corporation
Short Description: Treasury Offering of Common Shares
Price: $36.95 US per share.
Settlement: September 23, 2009.

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

[Zorro]

Re: Gold News (?)

I for one, couldn't really understand the article until I googled 'What is Gold hedging'... where I found this wonderful article:

Excerpt from : http://www.zealllc.com/2002/goldstk101.htm



Adeptus

The above example is the worst description of a hedge I have ever read. In fact it does not describe a hedge at all but rather contract selling of future production.
If for some reason a firm had sold forward production to the extent described, it is a hedge that would be used to secure a possible rise in future prices.

Z

[ThePythonicCow]

Re: Gold News (?)

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.

Extending my gold-foil-hat speculation above, I speculate that JPMorgan wasn't shorting gold just to annoy us gold bugs. I speculate that they were part of the oil for {dollars, gold mining future production, military protection} deal that kept the Saudi oil flowing, in dollar denominated contracts, to the U.S. and others all these years after Nixon closed the gold window. JPMorgan wasn't selling gold short so much as selling gold still in the ground, to a very special customer. Like Barrick, JPMorgan may have to cover these shorts, meaning deliver the real gold to Saudi Arabia. Of course, a few billion here or there is a round-off error on JPMorgans books, as opposed to a "big deal" on Barrick's books. So we'll likely never see JPMorgans cover of this deal, other than in rising gold prices.

Buy gold!

[ThePythonicCow]

Re: Gold News (?)

The above example is the worst description of a hedge I have ever read. In fact it does not describe a hedge at all but rather contract selling of future production.

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.

[renewable]

Re: Gold News (?)

Let's calculate here: $1900 million negative position on 3 million ounces. That's $633 in the hole on each ounce. Barrick wrote those contracts for about $1000 - $633 = $367 per ounce. I'm glad I'm not the CEO of Barrick having to explain that one to my board today.

Thanks for working out the correct figures.

Jim Sinclair has a bit on the (now ex) CEO's involvement:

I stood in Barrick’s head office with the then President Oliphant and another top executive. I had gone to Barrick to make them a cash offer for Kabanga Nickel.

Oliphant asked me what I thought about their hedge program. I told him at $305 Barrick was in trouble and at $354.90 he was in trouble.

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

The other executive, still with the company, knows I am telling the absolute truth. I could have saved Barrick all these billions, but that is life.

[ThePythonicCow]

Re: Gold News (?)

I subscribe to the theory that forward selling by Barrick was probably part of an attempt to slow or cap the POG.

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.

They're going to be using this $3 billion to buy back their hedges; should be very positive for the price as, from the OP, Barrick will be buying back nearly 10 million ounces.

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.