It was recently announced that the world’s biggest gold producer was going to eliminate all of its gold hedges citing the very bullish outlook for gold prices. On the surface one would assume a large gold miner would relish higher gold prices. However, the truth is that Barrick Resources did everything they could to cap the gold price for over a decade. Why, you ask? Believe it or not, Barrick was working with the anti-gold cartel to keep gold prices from rising.
Keep in mind Gold hedges are futures contracts that commit a company to selling the metal at set prices. While hedges guarantee certain cash flows, they often commit a metals producer to ship the gold at prices lower than the current spot price. So let’s go back to 2001 when the price of gold was starting its bull run, Barrick Resources decided to hedge 8,000,000 ozs of gold. This meant that over a short period of time, Barrick sold 8 million ozs of gold, using paper derivatives. These sales halted gold price increases for over a year. Now, the purist out there says whenever a contract is sold short, it will one day have to be covered by the contract holder having to buy the commodity back to cover its short. The two contracts should eventually offset one another. A sale of gold required a re-purchase of gold. But in this circumstance, the power elites running Barrick knew that buying 8 million ozs of gold would drive the price through the roof, so instead they offered to pay off the hedge in cash, which the accommodating bank accepted. The bottom line is that they were able to sell 8 million ozs of gold to halt the price rise and settle the contract in cash, not affecting the price at all.
This neat little stunt cost the company’s shareholders more than $5.6 Billion. This is how much the company had to raise to pay off their hedges with the bank. Hence, it diluted all existing shareholders.
The Board of Barrick has George H. W. Bush and several Goldman Sachs and JP Morgan executives. Many observers on Wall Street understood this hedge book was simply a tool used secretly by the government to slow down gold’s price increase. This is why most “goldbugs” have a strong dislike for Barrick and its management.
This de-hedging action is still very positive for gold today. It relieves some selling pressures, while telling the world that management sees much higher prices on the horizon and they need to get from under these contracts or bankrupt the company.
This is not the end of the story however, because the counterparty to these hedges, probably J.P. Morgan (a stooge for the FED and Goldman Sachs) has obligations to deliver to some other entity the gold it was expecting from Barrick – probably a Central Bank. The question remains will the counterparty also be able to settle its obligation in cash or will significant quantities of gold have to be purchased? Barrick may be getting off the hook, but this technical default could exacerbate the shortage of physical gold.
This entire story is very bizarre, and blatantly illustrates how desperate the anti-gold powers are in doing whatever is possible to hold gold back from telling the truth.