Excerpts from Le Metropole Cafe tonight..

"The Barrick announcement is extremely bullish in my book because it strongly suggests Barrick’s bullion dealers, their counterparties, are in a twit about what is coming down the road price-wise. They know what the US government is throwing at the gold price to keep it down and they are having trouble due to the enormous physical demand and the changing dynamics in the market regarding MAJOR players … such as the Chinese, Russians, super hedge fund managers etc., and the withdrawal from the market of other sellers like the Europeans….

08 September 2009

Barrick Capitulates

Barrick Gold and their bullion bank partner J.P. Morgan were the target of lawsuits by the gold bulls, most recently Blanchard and Company, for price manipulation through the use of forward sales in their hedge book. The contention was that the selling was being used to manipulate the price of gold.

Barrick's initial defense was that since they were acting in conjunction with the central banks to cap the price of gold through their representative J. P. Morgan, they were therefore immune from prosecution since the central banks are immune from prosecution. Details of that story are here. The public document that Blanchard had put forward was shocking in its implications indeed, and can be seen here.

Almost as shocking as the complete lack of interest and follow up in such a potential scandal by the financial community, market regulators, and the media.

One has to wonder what Barrick's management now sees in the precious metal markets, in order to spend this amount of shareholder dilution to take down those fixed price contracts now.

On a related note, one of the current largest holders of the gold ETF (GLD) is now reported to be J.P Morgan, which is also a holder of one of the largest short gold positions on the COMEX. There was a bit of a row last year when it was revealed that the rules of the exchange would allow holders of short gold positions to make delivery good in, wait for it, the GLD ETF rather than in physical bullion….

Although for a large shareholder or group of shareholders in Barrick, one would think that a much more complete disclosure of the nature of this loss and the counter parties would be expected. How involved was J. P. Morgan? Was the Federal Reserve or any other central bank an actual counterparty or collaborator as Barrick apparently claimed in court in 2003? Does this have anything to do with China's recent position on derivatives obligations held by its State Owned Enterprises?

It does sound like there is now a Barrick put under the price of gold, in addition to the China put, that is, a floor under the price of the metal in the front month or spot markets.

The Barrick boneheads

Hi Bill!
Barrick Gold came out with the news today that they are going to eliminate their gold hedging. This comes as a surprise to some people I am sure, since I had many an argument with analysts in the past that tried to convince me that Barrick was hedge free. The company did a stellar job of pulling the wool down over the eyes of many nitwits that did not bother to read the financial statements. It was hidden somewhere around page 60-something on the annual report that Barrick did in fact have hedges still in place and now they are finally coming clean to buy them out.

And I do mean buy them out. To the tune of about a $5.6 Billion charge against earnings. That is in addition to all of the lost revenues through the years as they delivered into the hedges and recovered a gold price far less than spot. I can barely get my head around the concept of one company losing so much money, but in this day and age I guess dropping a billion here or a billion there is not even newsworthy anymore, since there are so many other pinheads in the executive offices of blue chips that blew up the balance sheets in such spectacular fashion that it has become common.

What irks me most about Barrick is the monumental arrogance of the entire management team, who were doing so much damage to the industry as a whole, beyond the losses they saddled shareholders with at their own firm. I can recall guidance from the company a few years back that the hedges were not a big deal, because they represented a small portion of the total production, and because they were structured so that they could be rolled over and had 15-year maturity dates. The Blanchard lawsuit exposed a lot of the real reason for those hedges. But the idea that the program would never go off the rails was beyond
incompetence. It reminds me of Dennis Gartman and his suggestion about the deficit spending in the US, 'Its not a problem until it’s a problem..." What nonsense! Well, it turns out for the boys at Barrick that the hedgebook WAS a problem after all. A big freaking problem. How many million ounces of gold could have been stockpiled for the same $5.6 Billion in losses? I dont even want to do the math. Why did it take these bozos until gold traded above $1000 to figure out that they were on the wrong track? They could have admitted they were wrong and resolved the problem at far less cost many years ago. A pox on all their houses! These bananaheads should qualify for the group award in the MOTY voting.

I was there in Las Vegas last year when you were debating Tim Wood about the manipulation and intervention in the gold sector, and I recall Tim made some comments how Barrick was the go-to stock for gold, that the poor company was unfairly attracting attention from the conspiracy theorists regarding its activity, and that it suffered in share price as a result. Tim also added his opinion to the effect that Barrick was the best run company, with the brightest management. I have great respect for Tim Wood, and I while I took issue with his comments during the Q&A portion of the event, I think he speaks on behalf of many analysts when it comes to gold. It seems that everyone thinks so highly of Barrick, when in fact the results of the company are a disgrace due to their misguided financial meddling and this huge charge to end that episode of sham will hopefully open a few eyes. I wonder if Tim still thinks so highly of Barrick.

For my own point of view, I wanted nothing to do with a company that was hedged up to its ears, and I even sold my holdings in a PM mutual fund that had Barrick as a top holding. There is a reason why Barrick lagged the sector in performance. GATA was right again about the stupidity of the Barrick hedges but I do not think you will hear too many people acknowledge that. Well congratulations Bill and the entire team at GATA, you called another one right.
cheers!
MexicoMike

Chris, Bill,
DEFAULT!!!!!!!!!!!

Angolgold has been reducing its hedges by delivering gold from production into the hedge contracts. In other words paying back the loans with gold…

It looks to me that this is the first major sign of physical market stress that I have been pounding the table about recently which was eloquently summed by Paul Walker, CEO of GFMS "large lumpy transactions in a market that has a degree of illiquidity". Barrick's deal represents a gold delivery DEFAULT. They are paying back cash. They are not paying back in gold.

QUOTE

The current negative $3.7 billion MTM position of the gloating contracts does not change with gold prices. No activity in the gold market is required to settle these floating contracts.

END

This is in my opinion is a bombshell. What will be the domino effect as the bullion banks that were meant to receive gold don’t have it to meet their obligations?
Cheers
Adrian