The following is an interesting independent look at Barrick Gold in 2009 by San Francisco School of Economics, Professor of Money and Banking, Antal E. Fekete. It offers further insight in how Barrick Gold uses hedges to manipulate the price of Gold.
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HAS BARRICK BEEN BARRICKED BY THE U.S.?
Antal E. Fekete
Professor of Money and Banking
San Francisco School of Economics
According to an announcement dated September 8, 2009, Barrick is going to throw into the
dustbin its long-standing hedge policy, and pay for buying back its hedge-book by diluting the
value of its common stocks through issuing more than 81 million new shares, or about 10
percent of the outstanding. The so-called hedges of Barrick have been thoroughly discredited
and will soon be history. So-called, because the long-term forward sales contracts in question
that the parvenu gold miner has invented and flaunted are not proper hedges and never have
been. They are a fraud. They are naked short positions pretending to be balanced by gold ore
reserves in the moon (or on this earth which, for hedging purposes, is practically the same
thing). Part of the newsworthy story, of course, is the fact that the hedge book of Barrick has
been increasingly under water for some nine years now, threatening the unfriendly giant with
drowning.
Within 24 hours another hasty announcement was made to the effect that the company,
instead of issuing 81 million new shares, will in fact issue 94.4 million, that may be raised to
109 million if the demand justifies it, for a total value of $4 billion — the biggest primary
equity offering in Canadian history according to the local media. The hike was explained by
“strong investor demand”. The market, however, put a big question mark to that “forwardlooking
statement” of the company in marking down Barrick shares 6.85% on the same day to
$36.61, the greatest percentage loss among the leading gold mining shares on the day.
Incidentally, in doing this the market has put a lower value on the Barrick stock than the
company did. Barrick is offering its new issue at the price of $36.95 per share.
The $1.9 billion that Barrick is hoping to raise through this dilution maneuver to
eliminate all of its fixed-price gold contracts falls far short of its goal of buying back its
hedges. The liability represented by Barrick’s once flaunted forward sale contracts has been
carried off balance sheet so far. These fixed-price gold contracts have a negative value of $5.6
billion, that will be charged to earnings in the third quarter. This negative value will almost
certainly increase during the next 12-month period Barrick gave itself to get out of the
quicksand. The announcement itself is a virtual guarantee of that: Barrick will have to
compete in the gold market with China, Russia, India, Brazil, and other countries (not to
mention other gold mines in dire need to de-hedge) for a diminishing amount of gold
available for cash delivery, to the tune of 9.5 million ounces in today’s strained gold markets.
The big unknown question is whether Barrick will be able to buy back its hedges fast
enough to stop the continuing hemorrhage. Barrick is racing against the clock. Gold is still
available for cash delivery, but in what quantities? and for how long? 9.5 million ounces is an
awful lot of gold to buy in today’s anemic gold markets with supplies drying up fast. With the
threat of the last contango and of permanent backwardation hanging overhead like Damocles’
sword, Barrick’s plan appears to be a pipe dream that will never be fulfilled. I may be in a
minority of one on this one, but Barrick’s future is anything but rosy. 9.5 million ounces is a
lot more gold than Barrick is able to produce in an entire year in the best of circumstances.
Even if Barrick were to sell not one ounce of gold in the open market for a whole year, but
deliver every ounce it extracts from the bowels of the earth to its hedge books, and even if we
accept the most optimistic assumptions of the company to increase its annual production as
realistic, there is still a shortfall of at least 1.5 million ounces. I submit that Barrick could not
survive if it was to suspend its sales of new gold in the open market for a whole year, while
facing the extra cost of forcing up production quotas. No lender in its right mind would
finance such a crazy plan. Creditors of Barrick would be all too happy to put the unfriendly
giant on the block, and sell Barrick’s stellar resources to the highest bidders, who would be
able to manage them in a saner and more responsible manner than present managers have.
Barrick’s managers were given the right advice twelve years ago that, at the end of the road
they have chosen, lies ruin and misery. They had all the time to change course. But even at the
last major announcement on “hedging” in 2006, when Barrick announced its new policy to lift
a part of its hedges, the then CEO Greg Wilkins said at the Annual Shareholders Meeting that
Barrick will always retain ‘a reasonable’ amount of hedges as an ‘essential risk-management
tool’. According to Wilkins, it is supposed to ‘stabilize’ revenues, and it is supposed to satisfy
banks that finance Barrick’s projects.
Two years ago I issued a public challenge to the management of Barrick in my piece
“Have Gold Bugs Been Barricked by the U.S.?” (see References below) as follows.
I demand an answer why Barrick ignored my recommendation in 1997 which I
personally presented to the then CFO Jamie Sokalsky. During those ten years my
worst fears have materialized. It turned out that the “hedging” policy of the
company was, as I had stated, deeply flawed. It was an unmitigated disaster of
the first magnitude. It resulted in horrendous losses to shareholders. It is not
clear why Jamie Sokalsky, widely rumored to be the author of Barrick’s “hedge
plan”, got rewarded with a promotion for executing a disastrous policy, and why
his new boss Greg Wilkins has stated in public that the company is standing by
its original hedging policy, albeit on a reduced scale. I categorically state that
Jamie Sokalsky had been thoroughly familiar with the alternative, what I called
the correct principles of hedging. He and I discussed the subject together at great
length, and he received from me a Memorandum that spelled it all out. This
Memorandum found its way into the book of the late Ferdinand Lips entitled
Gold Wars and can be seen there by any interested party.
I am disclosing it now for the first time that Barrick has ignored my challenge. Yet, as its
announcement of September 8 last proves, I was right all along. The “hedging” policy of
Barrick was so obviously insane, so much in conflict with any common business sense, that it
invited extensive speculation that Barrick was not really a profit-seeking business. It was just
a front set up and operated by the U.S. (and/or by other governments) in order to cap the gold
price. In other words, Barrick has been a partner to the greatest conspiracy in all history: to
throw dust into the eyes of the investing community making it believe the gold
demonetization fable. If the conspiracy theory is true, then the linchpin to cap the gold price
has been Barrick’s hedging policy. By aggressively selling gold forward at the expense of the
shareholders, the gold price could be kept in perpetual check — or so the script went. Just
make Barrick the world’s Number One gold producer, its hedging policy will frighten the
daylight out of any bullish speculator in gold. And we might as well admit that the conspiracy
has been rather successful, in so far as conspiracies can ever be successful.
In the article quoted above I made it clear that I was not a subscriber to the conspiracy
theory, although I reserved my right to change this opinion pending future evidence as they
become available. A major piece of evidence has just surfaced. Barrick has unceremoniously
discarded its long-cherished hedging policy, paying a heavy price in dragging the underwater
hedges into its badly punctured balance sheet that was no longer fooling anyone, and in
having to dilute the value of its outstanding shares.
Have I changed my mind about the validity of the conspiracy theory? Is it not an
appealing interpretation that a decision made by policymakers in the U.S. Treasury and the
Federal Reserve deemed that the cost of maintaining the gold cap at $1,000 is becoming too
high? The cap can no longer be defended in view of the world’s global credit crisis.
Subsequently Barrick was to be dumped and let to fend for itself in the rough waters after the
sinking of SS. Lehman. Barrick has received what it has so richly deserved: it has been
barricked by its partner in crime.
The supreme irony of this scenario would be hard to escape. This would not be the
first time that a creature of Peter Munk has been barricked by a government. There are some
older guys around still, like myself, who remember how the government of the Canadian
province of Nova Scotia has barricked Munk’s top line radio and hi-fi console manufacturing
business. At that time Peter Munk swore that he would never ever again accept a government
subsidy, nor would he participate in a conspiracy involving governments. It is all related in
Peter Munk’s approved biography in great detail (see References below).
Every business initiative of Peter Munk has ended as a fiasco and he went bankrupt in
consequence. After his radio and hi-fi business shipwrecked on the rocky coast of Nova
Scotia, his real estate enterprise in Egypt failed where he was to build luxury hotels in the
shadow of the great pyramids. His dabbling in oil fared no better. Rumors have it that he also
financed a franchise in Israel of Colonel Sanders’ and his boys to make pork chops “fingerlickin’
good” — that failed, too, although this could not be confirmed.
After an unbroken series of business failures Peter Munk has come to gold. Would
gold be kinder to him? There is hardly anybody alive who could appreciate gold’s value better
than he would. He owes his Holocaust survival to gold that was paid by his father to
Eichmann through Swiss intercession for their free passage from Hungary to Switzerland in
1944. Yet there is probably no one in the long line of failed gold mining executives who
misconstrued gold more thoroughly than Peter Munk has. Conspiracy or no conspiracy, Peter
Munk is an inveterate believer in the power of the U.S. government to manipulate the price of
gold. That is the secret of his downfall. Peter Munk’s gold business is no better than his other
businesses have been, only bigger.
I am still not committed to the conspiracy theory according to which Barrick has
allowed itself to be used by policymakers in the U.S. to cap the price of gold, although I must
admit that the circumstantial evidence has become a notch more circumstantial with this latest
announcement. To me it looks like the desperation of a passenger aboard the sinking Titanic
who has lost his life saver. I base my judgment on the timing. To make such an announcement
at a time when the gold price is challenging the $1000 level is a miscalculation of Babelian
proportions, not to say a suicidal dash to the exit. All this time was wasted, while the gold
price was under pressure, when exactly the same announcement would have been helpful to
Barrick — as it has to Newmont. It is too late now. I do not see how Barrick can remain a
viable business entity once it has lost its tether, real or imagined, tying it to the U.S. Treasury.
My sympathy is with the shareholders of Barrick, who are going to fare no better than those
of Lehmann Brothers. What people do not seem to understand is that gold locked up in ore is
one thing, and gold locked up in vaults is another. There are times, such as now, when their
values part company. Why? Because too many gold mines are just a conduit to make the
shareholder and his money part company. Remember Mark Twain having said that a gold
mine is a hole in the ground with a liar standing guard? Remember Bre-X? It is so much
easier to fool people than doing the back-breaking work of bringing up gold locked in the ores
deep underground.
Aaron Regent, the new President and CEO of Barrick, commented on the company’s
announcement as follows:
“The gold hedge-book has been a particular concern among our shareholders and the
broader market which we believe has obscured the many positive developments within
the company. As a result of today’s decision we have addressed that concern and
maintained our financial flexibility. With the industry’s largest production and
reserves, Barrick provides exceptional leverage to the gold price, which we expect will
be further enhanced as we build our new generation of low-cost mines.”
But leverage works both ways. In the case of Barrick it has always worked the other way. Mr.
Regent sounds as if the troubles of Barrick were now over as management has finally decided
to bite the bullet. They are not. The agony will last until the last vestiges of the nightmare of
“hedging” will be erased. Even in the optimistic appraisal of management it will take at least
one year. In reality, it will take much longer, as ever higher gold prices will frustrate efforts to
close the hedge-book for once and all. The fact is that the wolf is at the door and refuses to
leave. The problem of the hedge-book will keep resurfacing, until everybody will understand
that it is unmanageable. The cat is chasing its own tail.
The job cut out for Barrick is the job of Sysiphus. He was a king who betrayed Zeus’
secrets. As a punishment he was confined to Tartarus and made to roll up a boulder to the top
of the mountain only to see it falling back, and his travail would start all over again.
When everybody sees Barrick as the latter-day Sysiphus, the company will give up the
ghost, and the cheerful creditors will happily carve up the rich caracass, with former
shareholders looking on in dismay.
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS ARTICLE IS SOLELY FOR YOUR INFORMATION AND
ENTERTAINMENT. THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON
IT, NOR IS HE SUGGESTING THAT IT REPRESENTS, UNDER ANY
CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL ANY SECURITY. HE
HAS NO POSITION, LONG OR SHORT, IN BARRICK STOCK, NOR DOES HE INTEND
TO ACQUIRE ONE. THE CONTENTS OF THIS ARTICLE IS DERIVED FROM
INFORMATION AND SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR
MAKES NO REPRESENTATION THAT IT IS COMPLETE OR ERROR-FREE, AND IT
SHOULD NOT BE RELIED UPON AS SUCH.
References
Have Gold Bugs Been Barricked by the U.S.? www.gold-eagle.com/gold_digest, July 12,
2007.
Charles Davis, So Big It’s Brutal, Report on Business, The Globe and Mail: Toronto, June,
2006, p. 64.
Bob Landis, Readings from the Book of Barrick: A goldbug ponders the unthinkable,
www.goldensextant.com, May 12, 2002
Richard Rohmer, Golden Phoenix, the biography of Peter Munk, Key Porter Books, 1999
Antal E. Fekete, The Texas-Hedges of Barrick, www.professorfekete.com, May, 2002
Ferdinand Lips, Gold Wars, Will hedging kill the goose laying the golden egg? p. 161-167.
New York, FAME
Antal E. Fekete, To Barrick or to Be Barricked, That Is the Question, www.gold-eagle.com,
August 11, 2008
George Bush’s ’Heart of Darkness’ — Mineral Control of Africa, Executive Intelligence
Review, January 3, 1997, see in particular:
Barrick’s Barracudas
Inside Story: The Bush Gang and Barrick by Anton Chaitkin
George Bush’s 10 billion giveaway to Barrick by Karl Sonnenblick
Bush Abets Barrick’s Gold-digging, by Bail Billington
See also: http://american _almanac.tripod.com/bushgold.htm
September 9, 2009
Calendar of Events
University House, Australian National University, Canberra: first week of November, 2009
Peace and Progress through Prosperity: Gold Standard in the 21st Century
This is the first conference organized by the newly formed Gold Standard Institute.
For further information, e-mail: feketeaustralia@gmail.com ,
On the Gold Standard Institute, e-mail philipbarton@goldstandardinstitute.com
Martineum Academy, Szombathely, Hungary, in March 2010.
Stay tuned for further announcement.
Professor Fekete on DVD: Professionally produced DVD recording of the address
before the Economic Club of San Francisco on November 4, 2008, entitled The
Revisionist History of the Great Depression: Can It Happen Again? plus an interview
with Professor Fekete. It is available from www.Amazon.com and from the Club
www.economicclubsf.com at $14.95 each.
DVD’s of the Gold Standard University Sessions
Session 3 (Adam Smith’s Real Bills Doctrine and Its Relevance Today)
Session 4 (The Bond Market and the Markey Process Determining the Rate of
Interest)
Session 5 (A Primer on the Gold and Silver Basis)
Session 6 (Encore Session: The Great Depression)
are now available. For details how to order, see the announcement on
the website www.professorfekete.com .PDF Source -
http://www.professorfekete.com/articles%5CAEFHasBarrickBeenBarrickedByTheUS.pdf
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