Monday, September 14, 2009

Duh! Barrick Is Bullish on Gold

Barrick Gold has been hedging its gold production by selling futures contracts, thus locking in the price a year or more in advance of the physical gold being mined. This is a great strategy when gold is falling in price. It makes no sense when gold is in a bull market.

Gold has been in a bull market for close to 10 years. It has climbed from a low of $255.10 an ounce to over $1,000 an ounce.

Thus, Barrick Gold executives look pretty much like idiots. What were they thinking say back in 2003, when all the key players new gold was the place to be.

Finally, $750 per ounce later, Barrick will no longer be hedging its production. But, get this, Barrick has announced it is going to raise up to $3.5 billion through a share offering that will eliminate most of its remaining gold hedging contracts. In other words, current shareholders will be diluted as a result of corporate ineptness. They need the money to buy back the hedges they have on.

The company said it would take a $5.6 billion charge against third-quarter earnings to reflect a change in accounting treatment of its hedging contracts. The current hedging book covers 9.5 million ounces, or significantly more than Barrick’s projected 2010 output of between 7.7 million and8.1 million ounces. They also have floating contracts that are underwater to the tune of near $2 billion.

Bottom line, you have a gold production company that has been in effect shorting gold. In a bull market for gold, who would buy such a stock?

For what it is worth, and this has to be scary for the gold price short-term, if you think Barrack is run by a bunch of idiots. But, Barrick is now bullish on gold. Barrick explained its move by pointing to an “increasingly positive” outlook for gold. It added that it expects “global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies”.


  1. Insightful. But is anyone paying attention?

  2. For what it's worth, many in the gold community view Barrick's as part of the cartel. In other words, the executives have been bought off to keep the price down, and thus on the same team as the fiat pushers at the Fed and Treasury.