-- Posted Thursday, 10 September 2009 | | Source: GoldSeek.com
There have been many articles and stories written about the Barrick hedge closing announcement already, but I want to add one to the pile and try and surmise two possible outcomes.
To explain the title I refer you to an old article by Professor Antal E. Fekete who told how exactly Barrick got their name. From the article he states;
“At an early brain-storming session, as described in the authorized biography of Munk, the question was raised how to name the fledgling company. Munk, who was obsessed with big and quick success had no patience with such trivial details, exclaimed: ‘Call it Baszik, Szarik, Barrick, as you will; I couldn't care less’. The name Barrick stuck. Knowledge of the Hungarian language helps the etymologist. The first two words’ English equivalents are ‘f...ck’ and ‘sh...t’. In Hungarian four-letter words have six letters to sport and, as verbs, they are also distinguished by their ‘-ik’ ending, forming a special conjugation class of their own.”
Barrick Gold has finally given in and is raising about $4 Billion in order to close out the hedges. First, I want to congratulate Mr. Jim Sinclair as well as GATA on being right. Both Mr. Sinclair and GATA have long warned Barrick to close out their hedge book. Many hundreds of dollars ago the gold price future was perhaps not as certain as it is today unless you knew what GATA knew. For Barrick to not even look into their evidence is a shame for their shareholders. GATA is being proven more and more correct every week now and this is one of the biggest admissions of the correctness of their evidence and Jim Sinclair’s market savvy.
I have a couple of thoughts on the announcement by Barrick to close down their hedges. First, and most unlikely, they could be signaling the top, as they signaled the bottom when they opened these hedges near the bottom back in the late ’90’s roughly.
It’s hard to determine when exactly these hedges were put on, or at what price exactly the fixed rate hedges are set, but the general consensus is that they are between $300 and $350.
Taking the companies press release today I see that the $1.9 billon raised divided by the 3 million oz hedge position comes to 633.333 per oz they will pay. To keep it simple I’ll say gold is at $1,000 oz making their hedge book price roughly $367, slightly above consensus. This puts the timeline of hedges between 1998 and 2003.
The second thought I have is where exactly will this gold come from? It could come from the physical market, but would likely drive prices higher in turn costing Barrick even more than originally planned. This would also be true if the second wave of this financial crisis comes ashore over the next few months as I expect.
My second thought brought memories of the announced IMF gold sales of roughly 14 million oz. The Barrick hedges amount to 9.5 million oz and could be covered by the IMF sale with some left over. Barrick could potentially negotiate a fixed cost and close out the whole lump sum in one foul swoop.
Some may recall a lawsuit brought about by Blanchard and Co. Inc. in 2002 whereby both Barrick and JP morgan were accused in an anti-trust lawsuit of “unlawfully combining to actively manipulate the price of gold”. The result being that “Barrick had become the agent of the central banks in the gold market, and, as the agent of the central banks, shared their sovereign immunity and thus could not be sued”.
Perhaps, since Barrick did some favors for central banks back in the day, they may call them in now and try and get a good deal on some Central Bank, or IMF gold. The Central Banks have been none too eager to dishoard their gold in recent times and have trended towards accumulation so the planned sale by the IMF looks to me to be a great potential opportunity for Barrick.
Anyone who takes a few minutes to look at Barrick’s Board of Directors will soon see that it is comprised of the worlds elite, and some would argue most powerful and influential individuals. You would be hard pressed to find any company in the world with such a list of “talent”. The contacts and influence this group has is unmatched.
As usual, I bring up the Chinese desire to accumulate gold as well which would be certain competition for Barrick’s potential bid. We all know that the Chinese USD reserves dwarf any amount Barrick could ever hope to have in their coffers and would surely win any potential bidding wars. In fact, it wouldn’t surprise me if the Chinese payed double the spot price at any given moment just to get physical gold.
To sum it up, it could be great news that the hedges are now going to be closed, as it would essentially put a floor under the gold price as Barrick buys gold in the open market to cover hedges. Or, it could be the kiss of death since it seemed, not long after many of these hedges were initiated that the gold price took off, similar to “Brown’s Bottom”. My bet is that it will put a floor under the price of gold. Regardless of the power the board has in the world China does not play by their rules, and is becoming much more powerful.
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Until next week take care and thank you for reading.
Warren Bevan
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-- Posted Thursday, 10 September 2009 | Digg This Article
| Source: GoldSeek.com
