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Economist Murenbeeld defends Barrick''s hedging program
Hot, but still not respectable;
Gold's image problem
By Steve Maich
Financial Post (National Post), Canada
Friday, December 20, 2002
Gold may be having a great run of late but it
still has a serious image problem.
To many mutual fund managers and analysts,
this week's lawsuit by metals dealer
Blanchard amp; Co. against Barrick Gold Corp.
and J.P. Morgan Chase amp; Co. is just another
sign of how far the metal has fallen in the
eyes of the investment industry.
The plaintiffs allege that Barrick, J.P.
Morgan and other bullion banks have conspired
to sink the price of gold for the last 15
years, using complex derivatives trades and a
web of off-balance sheet schemes. This, they
say, has been the driving force behind gold's
31% slide since 1987.
But others see it differently. They say that
the biggest reason for gold's fall from
favour is not central banks selling their
reserves, nor is it big gold miners selling
their production short on the derivatives
market. Rather, it is the gold bugs
themselves, who feed rumours of vast
conspiracies, that are most responsible for
the sorry state of the gold market.
quot;The problem is that there are lots of
bizarre people among the gold investors,
which has made it difficult to make gold
respectable,quot; said Jean-Marie Eveillard,
manager of the US$125-million First Eagle
SoGen Gold Fund.
quot;Gold has the opportunity to be a minor but
legitimate alternative asset. Pension funds
have owned oil, timber and real estate, but
they won't own gold as a physical monetary
It wasn't always this way. Gold was once
considered a core holding in all serious
investment portfolios. Until the 1980s, money
managers talked about asset allocation in
terms of their weighting of stocks, bonds,
cash and gold. But not any more.
Over the past 15 years, as gold fell from a
high of US$499.75 in 1987 to its 1999 low of
US$252.55, many pension fund managers turned
their back on the metal for good.
Meanwhile, a select few managed to turn the
metal's descent to their advantage, and none
more so than Barrick.
In 1987, chief executive Randall Oliphant,
then Barrick's treasurer, devised a system of
derivatives hedging with several major bank
partners that would allow Barrick to generate
reliable cash flow even if gold prices
tumble. Its hedge book has generated profits
of more than US$2-billion since then, and has
allowed Barrick to grow into the second-
biggest gold miner in the world by snapping
Along the way, dozens of other major gold
miners, such as Placer dome Ltd., have sought
to emulate Barrick's success, hedging some of
their own production.
But now, that success is coming back to haunt
them. Suspicion about the stability of their
derivative exposure continues to hang over
Barrick and other hedged producers.
Yesterday, gold rose US$2.42 to US$345.67,
but Placer and Barrick shares fell 3.5% and
The problem, analysts said, is that most of
the gold industry's hedging happens in the
derivatives market. Those futures and options
trades take place over-the-counter, with few
disclosure requirements, and the opaque
nature of the market has provided fertile
ground for rumour, innuendo and suspicion.
That suspicion was the basis for the creation
of the Gold Anti-Trust Association, also
known as GATA, two years ago. The group's
founder, Bill Murphy, is one of the leading
voices trying to expose what he considers a
massive worldwide scheme to suppress the
price of the metal and boost the U.S. dollar
and world stock markets.
Blanchard's lawsuit echoes many of the
allegations made in a suit filed by GATA in
December, 2000, in Massachusetts, against
several bullion banks, the U.S. Federal
Reserve and its chairman Alan Greenspan.
Blanchard officials weren't available to
discuss their legal action yesterday, but
several observers say it will likely succeed
only in attracting more ridicule from
mainstream money managers.
quot;Gold, given its nature as a conservative
investment, has a huge image problem,quot; said
said Doug Pollitt, an analyst at Toronto-
based Pollitt amp; Co., who has a negative
rating on Barrick. quot;Suits like this don't
It's time, Mr. Pollitt said, to stop talking
about central banks and hedging strategies,
and start focusing on supply, demand and the
flow of capital.
quot;Another lawsuit is the last thing the gold
market needs,quot; he said.