Barrick Gold Ripe for Bear Raid

September 17, 2009

Could it be that one response to the Chinese shot across the bow of the corrupted and leaky USS Derivative ship at sea is the announcement that Barrick Gold to cover their entire hedge book… again? Maybe! They covered them all in 2007, didn't they? They said they did! This is turning out to be an event every two years. Maybe in 2011 they will announce cover and closure of their entire hedge book again. Last time, the key words in the fine print were closure of all hedged gold positions from operating mines. That meant they were willing to lose billion$ in shareholder equity on all mines not yet open, but with ongoing gold price exposure. No wonder they installed a new CEO recently. They have burned through over 20 years of profit in this hedge book strategy, useful for the USGovt but disastrous for shareholders. The ongoing dilution of their stock will continue for a few years more. The next big question is where will Barrick purchase the gold to fulfill the contracts and retire them with metal delivery. It looks like the open market. Maybe the source will be IMF gold bullion. Maybe they own a raft of StreetTracks GLD shares passed under the table from hedge funds. Their operations suffer greatly, from capital drained for balance sheet repair rather than mine development. They boast being a giant among miners, but their production given their equity is pathetically low. They remain a finance firm masquerading as a mining organization, and have finally been caught with their pants at their ankles.

Why the Barrick Gold (symbol: ABX) stock is not cut in half promptly is a mystery to me. They implicitly admit a grand lie from two years ago, with remaining grand hedge book exposure. Perhaps because it remains somewhat a sickly darling among institutions, which are probably either dumb as fence posts or bribed by simple lavish lunches and government back scratches. The Barrick news should be considered as a link in a chain of events likely to unfold in the next several months. The conflict, labeled by me in the September Gold & Currency Report of the Hat Trick Letter as 'Financial Trade War' with China, is indeed significant, dangerous, and far reaching in its potential for conflict. In 2005 and 2006, my analysis pointed out that a severe trade war with China was likely within two to three years. It has been festering beneath the surface in the last year, and has begun to erupt in full glory. Poking sticks at creditor eyes is not a fruitful practice, as the United States will soon learn. The end result will be a steady push into the Third World and a reduced role in global banking.


The Gold price has advanced finally beyond the 1000 mark. The silver price shows much more gusto, strength, and resilience, as it easily swept past the 17 mark. The Gold price rise is much like a powerful centipede climbing a wall. It has many legs (bidders). The Gold price benefits tremendously from the 'Beijing Put' as the Chinese keep a firm bid under its price. This is fully described with actual direct quotes on Chinese policy in the September Hat Trick Letter report. They hide nothing anymore in their financial war, centered upon Gold & the USDollar. See the comments by Ambassador Cheng. The factor is as strong for lifting the gold price as the 'Greenspan Put' was for lifting the entire US stock market. China has fortified its strong bid for gold by means of numerous initiatives. They installed a Yuan swap facility for other nations to import products. They are migrating to a Chinese bank system built upon the Yuan. They have begun to sell Yuan denominated Chinese Govt debt securities. They have arranged to coddle the Intl Monetary Fund and expect to receive boatloads of gold bullion out the back door from the loading dock, thereby avoiding the embarrassment of Western nations handing over gold in exchange for USTreasury Bonds. The IMF gold transfers are clear redemption of gold for USTBonds!!! The Chinese indeed have a bid under the gold price. They have decided to push the gold price over 1000. Perhaps they thought the time was right, after their orders to Obama not to reappointment Bernanke as USFed Chairman were ignored. Bernanke is banned from setting foot on Chinese soil. Obama takes orders from Goldman Sachs, not Beijing.

The key characteristic of the rising gold & silver prices is that they make tiny steps upward. The prices rise a bigger chunk at times, only to consolidate for a few days. The small steps the prices make ensure more stability in their rise. They are self-correcting along the upward path in strong stable fashion. The first stop for gold will be around 1130, on a course toward 1300 sometime in the next 12 months. The stops for silver will be 19 then 21, on a course toward perhaps 30 early next year. Gold has a very powerful reversal pattern and rising trend to provide its strength. Silver has a powerful slingshot pattern and rising trend to provide its strength. In the midst of the most serious monetary crisis the world has even witnessed or suffered, financial organizations and the people are gradually realizing only one true safe harbor exits, GOLD & SILVER.Later on, central banks will be net buyers. Include Russia and China and central banks are already net buyers of gold. The Hat Trick Letter Gold & Currency Report displays one chart that alone provides categorical proof that the practice of hedging against the weak US$ is done in volume.

For several months, it was noted how the gold price had risen to new highs in most every major currency EXCEPT the USDollar. That was Phase One in the Paradigm Shift. The financial environment had to run its course, to cleanse itself, and be subjected to a series of climax events to wash away US financial foundations, pillars and all. After the baseless US$ Death Dance seen last year from derivative contract payouts, the USDollar is finding its true level of value in the sewer.

My theory is simple. As long as the current players maintain control of the USDept Treasury and USFed respectively, the USDollar will sink in value and gold will rise in value. When the Wall Street premier tagteam exits the control room, the climax comes in a US$ crash and a parabolic upward move in Gold. Perceptions change as phases change, and new passage of the mantle. So do exposures and prosecutions, and apparently suspicious deaths among financial managers. See McDonald, Pang, Casperson, and Kelly just in the past week. Details in the Crisis Coverage Report, a separate Hat Trick Letter. The common folks might never know if these are suicides or hired hits in retaliation for lost investments, or even kills to cover up dangerous money trails. Banker deaths in Europe have occurred for several months. Now they come to the Untied States. Soon the kidnappings for ransom might arrive on America's doorstep.


Finally the Gold price in US$ terms leads the globe, with a breakout above the $1000 mark, enough to capture world attention. Only the Gold price in the US$ is breaking out to new highs. The painful breakdown decline in the USDollar is the reason why. All currencies are damaged, but only the USDollar is in steep decline. The first phase is complete, a perverse rise from insolvent liquidations and contract satisfaction. The second phase has begun. Foreigners have had a full year to remove the control levers, to tear down the required pillars, and to force the USDollar exchange rate to seek its true value. A shock will surely be felt, financially and politically and socially when the 30% to 50% decline comes. The 50% decline might come from a formal introduction of a new USDollar, worth half as much, but with a shiny pretty new bill to carry around. Unfortunately, the debt burden associated with the USDollar will also be carried around.

The point is that the gold price is now rising and breaking out ONLY in US$ terms. The sick hangover from the first phase has ended, as the nation enters a dangerous new phase. The Gold-Euro price and the Gold-Swiss price and the Gold-Pound price and the Gold-Canadian$ price are all struggling to rise above their February highs. The four gold prices are shown in the same order. They might actually remain in a leveling pattern until the USDollar is finished with its powerful upcoming decline. That decline has only begun, as another 20% to 25% is assured.


The gold cartel player Barrick Gold plans to cover all of its gold hedge (again). Only trouble is the funds they raise will cover only 60% of their total gold hedge book. This is a serial event, resulting in huge dilution to hapless stock holders in a syndicate outpost firm. They still do not come clean, continuing their half truths. My hope is that Barrick is taken out by a hostile acquisition after a bear short raid on its impaired stock, acquired on the cheap!

The Barrick story is central to the strong control of both gold and some large miners. Barrick not only crawled in bed with the cartel bankers, but grew from the Wall Street cradles after being hatched. Barrick Gold (symbol: ABX) has announced a plan to eliminate its gold hedges. It seems just two years ago they promised the same unfulfilled task. Last time they closed gold hedges on 'all operating mines' to be exact. This time they continue the pattern once more. Barrick has entered into an agreement with other syndicate players on yet another secondary stock sale. The set of underwriters includes RBC Capital Markets, Morgan Stanley, JPMorgan Securities, and Scotia Capital for a bought deal public offering to raise $3.5 billion for 81.2 million common shares at a price of $36.95 per share. That constitutes a 10% dilution to their stock on a share count. A $5.6 billion charge to earnings will be recorded in 3Q2009. Common shares outstanding will rise from 873 million shares to 968 million shares (or 982 million shares if the over-allotment option is fully exercised).

Barrick claims to have made a strategic decision to gain full leverage to the gold price on all future production, and to exploit the effects of global monetary and fiscal reflation expected to span several years. They see a consequent increased risk of higher inflation and a future negative impact on the value of global currencies. They also note continuing robust gold supply & demand fundamentals. They bemoan the adverse impact to the broader investment community from the persistent huge hedge book (but fail to mention it never goes away). Hence, its share price performance has not kept pace with the gold price runup. The 'ABX' shares had actually been an institutional favorite, recommended by brokerage houses in recent years for some reason. One would think Barrick was at risk of declared bankruptcy. They keep selling stock to cover their endless hedge book, and keep wrecking their balance sheet in the process.

Aaron Regent is President and Chief Executive Officer. He said, "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." What interesting twists of the facts. They have the worst leverage to the gold price in existence. Furthermore, their secondary stock issuance will not cover their remaining 9.5 million ounce gold hedge position as claimed for the purpose of the stock sale. In other words, they are short that 9.5 moz gold, and chronically lose big money when the gold price continues its upward flight. See the Money Central article (CLICK HERE).

Let's follow some Mark-to-Market math, useful to understand the painful squeeze on the gold cartel generally, which includes both investment bankers (holding COMEX positions) and mining firms in collusion. Based on a $993/oz spot gold price, Barrick would record a $5.6 billion liability on its balance sheet, to be recorded in 3Q2009 as a result of a change in accounting treatment for the contracts. At $1010/oz (current gold price), the liability is 1.7% greater, almost $5.7 billion. It recorded a slightly smaller but gigantic loss two years ago. One must ask how many decades of profits have been burned up by their hedge book strategy over the last several years??? Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its 3 million ounce fixed priced gold contracts (sold forward at $370/oz) within the next 12 months and approximately $1.5 billion to eliminate a portion of its 6.5 million ounce floating spot price gold contracts. Further hedges remain, like a never-ending nightmare. Based on calculations, Barrick has estimated a cost of $569 per ounce to close the floating rate contracts. (That cost is higher now.) At that price, and based on the $3.5 billion equity raise, they should be able to close out approximately 2.6 million ounces of floating rate contracts. That should leave around 3.9 million ounce floating contracts after all the cash from the announced secondary issuance is drained. To close out the entire Barrick hedge book would call for an additional $2.2 billion. The company contradicts its own claim to cover its entire hedge book with a statement that they are willing to use use debt (corporate or commercial) to close out the remaining hedges if the cost of that debt was less than 5%. So more acid packs rest on the balance sheet. Thanks to Adam Graf at Dahlman Rose for his rundown on the math.

It is my fervent hope that Barrick Gold is pursued by expert arbitrageurs and is forced to relinquish control of its company and properties. Its eventual liquidation would herald the upcoming $2000 gold price, maybe $3000. The process might have begun with hordes of selling since the announcement to cover their hedge book. They probably just took the share price down to the secondary stock sale announced price. Maybe the market will remember their last 'cover' of their 'entire' hedge book. Notice the ABX stock is on a downtrend. The dilution of 10% is registered in the price move from 42 to 38. Barrick will still have exposure to at least 4 million ounces short, a severe burden on its shoulders. The stock is stuck in a uniquely strange pattern. The downtrend is attempting to turn upward gradually. Given the hedge book is not yet covered, their exposure remains, above and beyond their share dilution. A sudden run to $1100 gold would crimp their plans, and leave them with even more floating contracts after raised funds are used and spent. China certainly changed the landscape in the last couple weeks, ramping up the Financial Trade War. The gold price right away topped the elusive $1000 mark. Barrick executives might actually be motivated to cover gold shorts before the COMEX defaults and is threatened with a shutdown. The always perceptive Jesse of the Café Americain agrees with this potential motive.

The excessive hedging by Barrick has left the company hollowed out financially, unable to properly exploit even the deposits on its own properties. It should have raised money to develop mines, and thus exploit the rising gold price. Instead, it raises money to cover its errors in a disastrous strategy. This is precisely an example of what my analysis has called 'Inelastic Supply' that describes the phenomenon of a higher gold price resulting in less gold output. We see it in spades with Barrick, the posterboy in gold mining recklessness and incompetence.



From subscribers and readers:

At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

"Thanks for the quality of the information you put forth in your newsletter. I read a lot of newsletters, blogs, and financial sites. The accuracy of your information has been second to none over the past couple of years."

   (MikeP in Missouri)

"You freakin rock! I just wanted to say how much I love your newsletter. I have subscribed to Russell, Faber, Minyanville, Richebacher, Mauldin, and a few others, and yours is by far my all time favorite! You should have taken over for the Richebacher Letter as you take his analysis just a bit further and with more of an edge."

   (DavidL in Michigan)

"I used to read your public articles, and listen to you, but never realized until I joined what extra and detailed analysis you give to subscription clients. You always seem to be far ahead of everyone else. It is useful to 'see' what is happening, and you do this far better than the economists! I can think of many areas in life now where the best exponent is somebody not trained academically in that area."

   (JamesA in England)

"You seem to have it nailed. I used to think you were paranoid. Now I think you are psychic!"

   (ShawnU in Ontario)


Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at For personal questions about subscriptions, contact him at

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.