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Ashanti''s troubles shouldn''t hurt Golden Star
2:45p EST Sunday, February 13, 2000
Dear Friend of GATA and Gold:
As you'll see from the article below, even The New York
Times took note of gold and the hedging issue today.
Is it time to sell already?
We're not on the cover of Time yet, but things seem
to be moving our way. The forces that want gold
pushed down are retreating and close to being
Please post this as seems useful.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
BARRICK ALTERS POSITION ON HEDGING
By Jonathan Fuerbringer
The New York Times
Sunday, February 13, 2000
When Barrick Gold, the most successful hedger in the
mining business, curtails the practice, that's news.
And when the same company gives up some of its locked-
in gains to make a bet that gold will rally, something
has changed in this precious-metal market.
So what is Barrick up to?
Barrick, based in Toronto, says it is trying to satisfy
its shareholders, some of whom think hedging is a sin,
although the practice allowed Barrick to produce record
earnings last year as the price of gold first hit a 20-
year low and then finished 1999 up just 40 cents an
quot;We did it for the benefit of our shareholders,quot; said
Randall Oliphant, Barrick's president. They need it. At
$18.31 on Friday, the stock is off 24 percent from
September, when gold prices surged on the news that 15
European central banks would restrict their gold sales.
A gold rally would also help company employees with
stock options. More than half of Oliphant's 825,000
stock options are still out of the money.
But Barrick is also falling into line with the more
militant gold producers, money managers, and investors
who argue that to get gold prices higher, producers
have to support the price of gold themselves. quot;We want
to be clear about the need for the industry to show
leadership and confidence in gold,quot; said Jay Taylor,
the president of Placer Dome, as the company announced
its own hedging pause on Feb. 4.
Confidence is expressed by not hedging, which among
gold's true believers is just as dirty as betting
directly against the price of gold. Gold producers
hedge by selling borrowed gold to lock in the current
price and then enhance that by investing the proceeds
in government securities. If gold doesn't rise faster
than the rate of interest they are earning, the
producers come out ahead.
A reduction in producer hedging, the argument goes,
would stop the selling of borrowed gold to lock in
prices. In 1999 a net 4.3 million ounces of gold were
sold by producers to hedge, equaling about 10 percent
of the total gold supply, according to Philip Klapwijk,
managing director of Gold Fields Mineral Services, a
precious-metals research firm based in London.
He now believes that, over all, producers will do no
net selling of gold for hedging purposes in the first
half of this year. Placer Dome, for example, will forgo
its plans to sell two million ounces of gold for
hedging this year.
What is unclear is how much Barrick's and Placer Dome's
reductions in hedging -- and those of other producers
-- will change the outlook for gold. Will this concerted
effort only get the metal safely above $300 an ounce, or
can it push the price even higher?
That is important. If gold, which was at $313.50 an
ounce in the futures market on Friday, doesn't rise
much more, Barrick's gold bet may not look so good.
Hedging each year's production -- especially at prices
that are well above the going rate for the metal --
seems as if it would satisfy investors. Indeed, Barrick
has netted $66 an ounce more than the annual average
spot price of gold for the last 10 years.
But gold investors want something different, as some of
them made clear in a survey taken by Barrick last year.
They want a company's earnings to respond quickly to a
rise in the gold price, although they often seem to
forget that this means it would respond just as quickly
to a decline.
In that way, they can effectively bet on the price of
gold. And they hope they can get an even bigger boost
through the stock price, because a dollar increase in
gold typically goes directly to the earnings of a
This investor preference is seen in a comparison of the
recent performance of Newmont Mining, which is not a
hedger, and Barrick. Since the gold rally began in
August, Newmont stock is up 24.4 percent. Barrick,
which had a guaranteed price of $370 an ounce this
year, is down 1.7 percent. (Barrick, however, has
trounced Newmont over the last decade.)
So Barrick moved to please its investors by betting
directly on gold through call options. Barrick will get
a dollar-for-dollar jolt to earnings if the gold price
moves above $319 an ounce after March 1 this year and
$335 next year.
Barrick paid for these options by giving up some of the
guaranteed returns that had been locked in through its
hedging. The options cost $6 an ounce for 2000 and $12
an ounce for 2001.
This means that the price of gold has to rise over $325
an ounce this year and $347 an ounce next year before
the company will make more than it would have made
without the options.
Barrick's investors, Oliphant, explained, quot;want a
certain amount of assurance -- and a lottery ticket.quot;