Buffett warning about derivatives sparks interest in gold


1:19a ET Sunday, March 2, 2003

Dear Friend of GATA and Gold:

Barrick Gold's lagging share price and Blanchard
& Co.'s antitrust lawsuit against Barrick and J.P.
Morgan Chase for manipulating the gold price made
a big story in today's New York Times, which is
appended here.

Note particularly the description in the Times story
of Barrick's "spot deferred" forward sales of gold,
apparently based on information provided by Barrick
itself. It often has been reported elsewhere that
Barrick could postpone for as long as 15 years its
repayment of this borrowed gold. But the Times story
says Barrick can postpone delivery virtually forever:

"In addition, if the dealer agrees, Barrick can 'reset'
the time limit every year, starting the clock over on
the 15-year deadline. If the dealer refuses, which
Barrick says has never happened, delivery would
be required 14 years later."

That is, Barrick's counterparty has never refused to
postpone repayment of its gold loans.

Now who possibly wouldn't mind if a gold loan was
never repaid? Certainly not a conventional financial
institution. But maybe a central bank whose first
objective was to suppress the gold price through
intermediaries like Morgan Chase and Barrick?

Maybe the author of the Times story, Kurt Eichenwald,
could be persuaded to look into the gold story a little
deeper -- starting with the question of exactly who
wouldn't mind if Barrick's gold loans are never repaid.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Gold is on the rise, so what's bugging Barrick?

The New York Times
Sunday, March 3, 2003


The economy is in the doldrums. The stock market is a
mess. War looms. Terror threatens. In other words, it
should be time to celebrate at companies in the
business of mining gold, long a haven in periods of
investor anxiety.

But one of the industry's largest players, Barrick Gold
of Toronto, hasn't been popping any Champagne corks
of late.

After years of top performance, Barrick's stock price
has slid, falling nearly 11 percent over the last year,
as prices for gold have soared nearly 18 percent.
Randall Oliphant was recently shown the door as
chief executive and replaced by another longtime
Barrick executive, Gregory C. Wilkins. Now,
Barrick has been sued by a gold dealer and gold
investors who say its success of the last decade
relied on manipulating gold prices.

At the foundation of many of its troubles is a wide
perception among investors that Barrick is not set
up to take advantage of a rising market because of
its strategy of locking in prices for future gold
production. That strategy known as taking a hedge
position has been used by Barrick for some 15
years, and company executives credit it with
bringing in some $2.2 billion of additional profit
during that time.

As the industry's glitter returns, investors fret that
the hedging strategy might turn Barrick's gold into
dross. "By far the biggest imputed liability to the
stock price we estimate is related to concerns
about the hedge book," said Chad Williams, a mining
analyst at Westwind Partners, an independent
institutional brokerage firm in Toronto.

Indeed, in a recent conference call, Mr. Wilkins
acknowledged that Barrick's hedge had become
something of a "lightning rod" among investors.
But company records, as well as interviews with
mining and finance experts, suggest that the
strategy will not have the negative impact on
Barrick's near-term financial performance that
investors fear. Ultimately, Barrick's largest
risks come from the legal challenge it faces and
from issues like production, lease rates for gold
and whether it will miss out on a higher price a
decade into the future.

Barrick is cutting back the size of its hedge
position. It now has about 20 percent of its 86.9
million ounces of gold reserves committed to hedges,
down from about 26 percent last June, according to
Jamie C. Sokalsky, its chief financial officer.

Still, for gold bugs, who approach investment in
gold with a fervor bordering on religiosity, the use of
any such hedges, which entail the sale of borrowed
gold into the spot market, is a heresy that damages
the marketplace. Hedgers, led by Barrick, have warred
with nonhedgers for years.

Recent events have only fueled the debate. With a
strategy described in exotic terms like "off-balance
sheet position" and "fixed-forward contracts," the
hedge program sounds the way the kind of toxic
ploys used by Enron did. For conservative gold
investors, they are the equivalent of the investment

"As a percentage of Barrick`s total assets, its
off-balance-sheet assets make Enron look like a
champion of full disclosure," said Donald W. Doyle
Jr., chief executive of Blanchard & Company, a gold
dealer in New Orleans that is the lead plaintiff in the
suit against Barrick in Federal District Court there.

Barrick insists and numerous analysts agree
that its strategy is far simpler and more adaptive to
market conditions than investors seem to believe. It
begins with a contract between Barrick and a large
bullion dealer, like Citigroup or J.P. Morgan Chase.
Under the terms of the contract, Barrick is required
to deliver gold at some future date. The contract, known
as spot deferred, allows Barrick to postpone delivery,
however, for up to 15 years.

With the contract in place, the bullion dealer then
leases that same amount of gold from a central bank,
selling it in the spot market. The dealer then effectively
places the cash from the sale on deposit, where it
earns interest. During the contract's life, the dealer
pays interest to the central bank as a fee for borrowing
the gold. Once Barrick delivers the gold, it receives the
cash from the spot sale and the accumulated interest,
less the lease rate and certain fees paid to the dealer.

That can give Barrick strong protection against a
falling market. If the spot price is $300, for example,
the hedge strategy could lock in a price five years in
the future of about $345. If the spot market is higher
than that price, Barrick can sell its gold there and
defer the delivery against the contract. As a result,
Barrick, on average, has made about $65 an ounce
above spot market prices on gold sales the last 15
years, the company said.

Barrick, which analysts say has the mining industry's
highest credit rating, has been able to gain particular
advantages in its deals with bullion dealers. It is
allowed to deliver gold against its hedging contracts
at virtually any point, whether in 2 days or 15 years.
In addition, if the dealer agrees, Barrick can "reset"
the time limit every year, starting the clock over on
the 15-year deadline. If the dealer refuses, which
Barrick says has never happened, delivery would
be required 14 years later. Most important, Barrick
does not have to post cash known as margin
if the price of gold rises significantly.

It is those features that make Barrick's program far
different from hedging efforts that have hobbled other
gold producers. For example, in 1999, when gold
prices spiked unexpectedly, margin calls and other
immediate financial consequences brought Ashanti
Goldfields of Ghana and Cambior of Canada close to
ruin troubles that the Barrick program is structured
to avoid.

None of this is free of risk. If gold's spot price rises
above the hedge price for more than a decade, Barrick
would be forced to sell its gold for less than its
nonhedged competitors would receive. Moreover, the
bullion dealers could demand delivery if Barrick
violated certain financial and performance requirements
for example, if a disaster occurred at its production
facilities that impeded its ability to deliver gold.

The hedging strategy also now faces a legal challenge.
In the federal lawsuit filed late last year, Blanchard and
the other plaintiffs accused Barrick of using its hedge
program to manipulate gold prices in violation of federal
antitrust laws.In essence, the lawsuit says Barrick and
J. P. Morgan Chase, which has participated in the
hedge program for years, used the strategy to force
down prices, allowing them to profit at the expense
of other market participants.

"If you look over the past six years, you will see that
when Barrack's hedge position has gone way up, the
price of gold has gone way down and vice versa,"
said Mr. Doyle of Blanchard. "Barrick created an
anticompetitive environment through the manipulation
of the price of gold, and they did it with the knowledge
and assistance of J. P. Morgan and perhaps some of
the other bullion banks.

"With the hedge program bringing future sales of gold
into the immediate spot market, Mr. Doyle said, Barrick
had the ability to cripple any rally in the price of the

Because the program also allowed it to profit in markets
that left competitors in poor shape, he said, Barrick was
able to use its competitive advantage to acquire other
companies, fueling huge growth.

So while he is no fan of Barrick, Mr. Doyle says
investor concerns about the hedge program's impact on
the company are misplaced a conclusion largely
based on his belief that Barrick still has the power to
manipulate prices.

"The risk to the company from the price of gold going
up is not all that great so long as Barrick still has the
ability to push the price back down again," he said.

A spokesman for J. P. Morgan Chase declined to

Barrick, which has formally notified Mr. Doyle that it
intends to file a slander suit against him and Blanchard,
dismissed the accusations in the suit as nonsense.

"Eighty percent of our gold is not subjected to any
hedge, so we are delighted with gold prices rising," said
Mr. Sokalsky, Barrick's finance chief. "For us to hope
against the value of our commodity going up would be

"Moreover, antitrust experts who reviewed the Blanchard
complaint said that they did not hold out any
expectation that the suit would be successful, primarily
because it misapplies antitrust laws.

"The antitrust laws are here to protect competition, not
competitors," said James Mutchnik, a partner at
Kirkland & Ellis in Chicago and a former prosecutor with
the antitrust division of the Justice Department. The
plaintiffs "are complaining of lower prices in the market,
and that is exactly what the antitrust laws are trying to
accomplish, which is to benefit consumers rather than
gold retailers." he said.

Mr. Doyle said the antitrust claim was also based on
what he described as Barrick's ability to use the hedge
program to drive up prices at particular times,
essentially by announcing its intention to suspend its
use. "With their spot-deferred contracts, they were in
the position to push up the prices periodically," he said.

But some analysts said that proving that Barrick's hedge
program significantly affected gold prices long term would
be challenging because of the many factors underlying
them. "Anyone with a legitimate understanding of how
the U.S. dollar-denominated gold price is derived would
not target any producer or any central bank for manipulating
it," said Mr. Williams of Westwind Partners, which
receives no banking fees from Barrick. The price, he
said, "moves mostly on the U.S. economy, interest
rates and inflation."Indeed, it was signals from such
economic indicators that led Barrick to cut back its
hedge position, according to Mr. Sokalsky.

Hedging "is a tool as opposed to a religion for Barrick,"
he said. "And we have been adjusting it to reflect
changing economic and financial situations. And with
the gold price going up, the reduction of our position
has been a good decision, in hindsight."


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