Published on Gold Anti-Trust Action Committee (http://www.gata.org)

GATA chairman on Kitco Thursday EST

By cpowell
Created 1999-12-15 08:00

10:30p EST Wednesday, December 15, 1999

Dear Friend of GATA and Gold:

While today's article about gold in the Financial Times
calls GATA a "fringe group," it pretty much accepts our
premises and predicts success for our campaign against
excessive hedging by gold mining companies. So we'll
take this as a big score for our side.

Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *


By Gillian O'Conner
Financial Times
December 15, 1999

Hedging has become controversial once more. For the
past few years an increasing number of gold miners have
relied on their portfolios of derivatives not only to
protect them against the falling metal price but also
to provide supplemental profits.

The hedging frenzy peaked in the first half of this
year, when the bullion price sank to just above $250 an
ounce and raised the spectre of profitless production
or mass redundancies.

But this left many companies vulnerable to the price's
sudden about turn in late September. Ashanti, Ghana's
pride, notoriously racked up enormous paper losses on
its portfolio and teetered on the brink of default,
because its banking counterparties has the right to
call for substantial cash deposits which the company
could not afford.

International investors were understandably
flabbergasted at the seeming paradox. When gold goes
down, miners' suffering is understandable. When the
price goes up, it must surely be good news.

But the public anguish of Ashanti and the Canadian
company Cambior showed that this is not necessarily so.

And worries that hedge problems might be lurking
elsewhere mean that the FT Gold Mines index has risen
only slightly more than the gold price since midsummer.
This is highly unusual.

Traditionally gold shares are bought as a geared play
on gold itself, and exaggerate its movements in both

Jo Foster of U.S. investment managers Van Eck
Associates, speaks for many when he says: "I cannot
overstate my disappointment. We get a rally in the gold
price and the result is two nearly bankrupt companies."

In the U.K., Mercury, a long-term opponent of hedging,
headed a recent letter to unitholders in its Gold and
General Fund: "Alongside every hedge there runs a
ditch." Graham Birch, manager, said that in recent
weeks he had been "astonished to hear gold company
executives declare that hedging 30-40 percent of
reserves and production is a low level of revenue
protection. They also cling to the idea that derivative
contracts with 10-15-year lives are attractive."

At Mercury, he added, "we are not prepared to mandate
companies to pre-sell vast proportions of the ore
reserve at low prices." As a consequence Mr. Birch
expects to have "near permanent big holdings in stocks
such as Harmony and Gold Fields." Harmony has never
hedged. Gold Fields has publicly recanted and closed
out virtually the whole of its hedge book.

Fringe U.S. pro-gold action group GATA (the Gold Anti-
Trust Action Committee) has been encouraging private
investors to sell companies that hedge, such as
Barrick, and buy those which do not, such as Gold

If such an attitude spreads and deepens, companies may
find themselves forced to abandon hedging in defense of
their share prices.

At the acceptable end of the spectrum come the ordinary
forward sales required by bankers before they put up
money for a new mine development. Even Gold Fields
still has some forwards in place in relation to its
Tarkwa project in Ghana.

At the unacceptable end come some of the exotics that
exploded in their buyers' faces in October: "escalating
ounce" calls, where the number of ounces the miner
could be asked to deliver rose with the gold price; or
Parisians, where the price at which it could be asked
to sell fell as the market rose.

Exotics were always a minor part of the market. What
about the large area in between the two extremes? This
is where the argument will be focused next year.

But it is not just about miners who are having second
thoughts about hedging. Bankers are having second
thoughts too.

Most bullion banks are said to be reviewing their
credit and margin requirements, and some banks for
which bullion trading is a minor activity could even
discreetly leave the field to their rivals. For both
reasons hedging habits are set to change.

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