Barrick gold hedge worst trade ever?

[MulaMan]

This guy claims Barrick cannot un-hedge its gold position without a world of pain, unless of course gold prices go way down again.

In a sense it seems like a $10 billion bet against inflation? If true, that does seem pretty dumb.

Nowhere in the article or the press release is stated the total cost of Barrick’s venture into short gold hedging. Let me rectify that. My estimate is that Barrick has lost, in total, more than $10 billion overall since it started the nutty idea of over-hedging its gold production. That’s larger than any single derivatives loss on history. That’s more than Barrick has earned in its existence. That’s $10 billion that could have gone to shareholders in the form of dividends, or to be used for acquisitions or legitimate corporate purposes, like eliminating debt or buying back shares. Instead, it was $10 billion completely squandered. Now, shares must be issued to pay for the gold short loss, diluting shareholder value. To add insult to injury, the management responsible for such a debacle rewarded itself lavishly.

But the magnitude of the loss and the ineptitude of entering into a transaction in which there is no ease of exit are but two components of what makes this the dumbest trade of all. The deciding factor that crowns this the worst trade of all-time is how long the trade has existed and how much Barrick was warned all along about how the trade made no sense. The level of arrogance displayed by Barrick management over the years to anyone, including shareholders, who tried to point out the folly of the short gold trade, boggles the mind. Please remember, the gold shorts being closed out now by Barrick were established at near $300 an ounce, meaning losses of $600 to $700 per ounce are now being taken on millions of ounces. I would submit that would be hard to accomplish, even for whoever might be the world’s worst trader.

http://news.silverseek.com/SilverSeek/1252940702.php

[Starving Steve]

Re: Barrick gold hedge worst trade ever?

A gold hedge is no loss to Barrick if the hedge was used properly to offset any gold mined by Barrick. Therefore, a hedge properly employed, limits market risk, whether the bet on gold was right or wrong. Up or down on the gold market, Barrick is always a winner.

Let's go over this again: On the upside, Barrick wins because it has the mined gold to sell at a higher price. And on the downside, Barrick wins because Barrick has sold the gold thru its hedge exactly when the gold was mined, so Barrick gets the old higher market price before the market drop occurred.

The only way to lose through a gold hedge is when the hedger tries to out-smart the market and play hunches. That is not hedging; that's gambling.

Let's go over this again: To lose money in a gold hedge, you have to have doubled-up on your position, either short or long. In other words, you have doubled-up the hedge bet with the gold inventory bet--- not to subtract one against the other, but to add one onto the other. So if you are right, you make double profits, and if you are wrong, you double your losses.

When the gold market goes to hell--- and sooner or later it will--- a gold mining company that has hedged its gold inventory properly will do just fine and survive the downturn. In business, survival in the bad years is just as important as profiteering in the good years.