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Newmont has
eliminated its entire 1.85 million ounce hedgebook
(Reuters, July 5) and, in doing so, it has catapulted itself into the
position of the world’s largest unhedged gold
producer. As those who have followed the gold-hedge saga will know, this is a
most serious challenge to Barrick since it has
wrested for itself the title of the world’ largest gold producer, even
though at the expense of swallowing the poison pill of hedge-books worse than
its own, for no better reason than propaganda. Whatever ephemeral advantage
it may have bought is spent by now. Gold bugs are flocking (not to say
stampeding) out of so-called hedged companies into unhedged
ones. Newmont’s coup is likely to be profitable to its
shareholders — and unprofitable to the shareholders of Barrick who have been bleeding 24 karat gold by the ton
ever since the bull market started back in 2001. If you believe in bigness
and want to own a piece of the biggest gold mining concern, you go Newmont.
Analysts have calculated that Newmont could recover the $578 million it has
spent on hedge buybacks, if the share price went up 1 or 2 dollars. After the
announcement was made, the price jumped almost one dollar to 40½ on
the kerb.
By contrast, Barrick is on record that it will never become
totally unhedged, even though it has grudgingly
reduced its hedgebook some in response to
shareholder unrest. In the words of President Greg Wilkins, a
’reasonable’ amount of hedging is an ’essential
risk-management tool’ for the company. It is supposed to stabilize
revenues. It is supposed to satisfy banks that finance its projects.
Newmont and Barrick have been arch-rivals not only on the Carlin
trend, but also on the global battlefield. Barrick
has been taking blows ever since its hedge-strategy, so called, started to
unravel in 2001, when the new gold bull was born, as was predictable. I have
pointed out in several of my papers that Barrick’s
hedging is no hedging at all under any circumstances. It is a fraud. As an
unlimited forward sale program, it is the most stupid and dangerous kind of
gamble, especially in an environment where the collapse of the international
monetary system in the wake of the collapse of the burgeoning debt-tower is a
distinct possibility. So much so that the question arises how responsible
businessmen, such as the officers of Barrick, could
commit the capital of their shareholders to such a demonstrably insane and
self-defeating policy that would burden them with a liability that could
never be lived down.
Contingency plan to keep the dollar as the
world’s reserve currency
How? Why, it has
been publicly suggested by some analysts that Barrick
is a front. It is not a profit-seeking business. As such, it is used by the
U.S. in order to cap the gold price. According to this view the strength of
the dollar is that it has only one viable alternative as a global currency:
gold. Therefore, if the U.S. wants to keep its enormously profitable
privilege to issue the world’s global currency, it has only to cap the
gold price. Conversely, if the U.S. failed to do it, sooner or later the
rising gold price would lead to an ignominious collapse of the dollar, by far
the worst currency debacle in world history. It would be the height of naivité to believe that the U.S. would idly stand
by watching monetary events to unfold, doing nothing, regardless how daunting
the task of stopping the gold train in its track may be.
I want to make it
clear that this is not my view. I haven’t bought into the conspiracy
theory. At least not yet, but I think soon enough I shall know for sure.
Newmont’s coup may reveal that the Emperor has no clothes. We
have to wait and see what Barrick’s response
will be. It is still possible that Barrick will
throw in the towel and follow the lead of Newmont. Just watch the spread
between the two stocks.
Be that as it may,
the question arises naturally what the best procedure to cap the gold price
may be from the point of view of the U.S. Obviously it would be
self-defeating for the U.S. overtly to put the remnant of its gold reserves
to risk in an effort to pacify surging demand. The ploy of the U.S. twisting
the arms of other countries to sell their gold reserves, while
retaining its, has been exploited for whatever it is worth. As the
U.S. was preaching water while drinking wine, it was not very persuasive in
the first place. A more intelligent and more promising strategy is to find a
gold mining firm that would covertly put its unmined
gold reserves to risk in support of the dollar. If a gold mine could convince
the world that its unlimited forward sales program, promoted as an
honest-to-goodness hedge plan, could attract imitators, then the fraud might
never be exposed, and chances were that it could be perpetuated. The regime
of the irredeemable dollar, like the Third Reich, could claim that it would
last „a thousand years”.
So it is at least a
plausible assumption that the U.S. has enlisted Barrick
to come out with its so-called hedge-plan to fool the world. Here is the
deal: the U.S. would covertly underwrite the potentially unlimited losses of Barrick in exchange for its complicity in the scheme of
capping the price of gold. As an incentive, Barrick
would be given the green light to gobble up its weaker brethren to become the
world’s largest gold producer. Neat, isn’t it? Yes, if you bypass
the ethical problem that the betrayal of shareholder trust on the global
scale would be unprecedented in the annals of business. However, that problem
could be managed by an ironclad stonewalling of the arrangement to guarantee
secrecy.
I repeat that this
is not my view. But the conspiracy hypothesis is being bandied about by
sufficiently many observers that it is impossible to ignore.
True versus fraudulent hedging
I have long realized
that there was only one way to unmask the fraud, if there was one, and this
was to prove that the so-called hedges of Barrick
were in fact no hedges at all, but unlimited forward sales backed by gold as
yet unmined, and in some cases might not be mined
for as many as fifteen years. Never mind that such a commitment is
meaningless because, while the gold may still be there fifteen years hence, Barrick may not be there to get it. It could be wiped out
by the surging gold price.
To call Barrick’s plan ’hedging’ is not simply
creating another misnomer. It is a terrible violence against language. It is
a malicious distortion of the true meaning of a perfectly honest word
describing a prefectly honorable
business activity.
True hedging for a
gold mine must be bilateral. It must be a strategy involving balanced
and limited forward selling cum forward buying in order to take
advantage of the fluctuating gold price. Net forward purchases and sales must
be limited to one year’s output and, most importantly, forward sales
must be balanced by forward purchases. In this way the loyalty of
speculators would not be permanently anchored to the short side of the
market. By contrast, under the hedge plan of Barrick
speculators could rest assured that it was perfectly safe to go short because
they had the benefit of the back-wind of the miners’ forward sales.
Note that this would no longer be the case if hedging was bilateral, since
the next move of the miners could very well be forward purchase, catching the
speculators off-guard. The unmitigated blemish on Barrick’s
hedge-plan is precisely this: it unilaterally commits speculators to the
short side of the market. To the insult of short sales by Barrick,
it adds the multiple injury of short sales by
speculators whose appetite has been whetted by Barrick’s
example. Individual speculators would consider going long an unacceptable
risk. Without any further ado, this fact alone makes the sincerity of Barrick’s management suspect. It also brings the
competence of banks into question that finance Barrick’s
projects. How come that heads at those banks haven’t been rolling along
with the head of Randall Oliphant, former president of Barrick,
after the utter fiasco of unilateral hedging has become publicly known?
Something stinks in those banks. If the real culprits are the financiers of Barrick, then perhaps the world has the right to hear
from them, and get a clear policy-statement. Can it be that the banks, like
dutiful shills, knowingly bet on losing horses on behalf of those who have
rigged the race?
Correction and apology
It could be objected
against this argument that Barrick’s
management has acted in good faith all along. It was simply a mistake on
their part to read only half of the dictionary entry on
’hedging’, the half about forward sales. In their rush to cash in
they have forgotten to read the other half on forward buying. Unfortunately,
we cannot offer this excuse in defense of Barrick. I have positive proof that Barrick’s
top brass was conversant with both halves of the dictionary entry that
defines „hedging”.
Last year I
published a paper with the title: To Barrick Or
to Be Barricked, That Is the Question. In that
paper I mistakenly stated that Chairman Munk fired
CFO Jamie Sokalsky, along with President Randall
Oliphant. While it is true that Randall was fired, Jamie was not. For this
mistake I have been upbraided by a reader of my column, Doug Peter, who says
he is the brother-in-law of Jamie. Here is his letter in its entirety:
Dear Professor Fekete:
Your last two
articles appearing on gold-eagle.com have references to Barrick
and contain misinformation on at least two counts.
First you stated
that Jamie Sokalsky was fired by Peter Munk. He was not. In fact, he was promoted and is now
Executive Vice President. I know this because he is my brother-in-law, and
his position can be easily verified by reference to the company’s
Annual Report.
Secondly, you claim
that Barrick does not mark to market its derivative
positions. In fact, the company must by law publish this information.
Recently it was spelled out on page 25 of its Second Quarter Report (2006)
showing the fair value of these positions in deficit to the extent of $4.13
billion.
One can only wonder
what other information you have misconstrued in your articles.
Doug Peter
Toronto, Ontario
Let me now discharge
an old debt. I hereby publicly acknowledge that, indeed, Jamie was not fired;
he was promoted. I offer my apology for this mistake. The reason I have
waited for so long to state it in public is that I sent a message to Jamie
through Doug. In that message I reminded Jamie that, at his invitation, we
had had a long discussion on gold mining and hedging at company headquarters.
At the time I was still a shareholder, and our meeting took place with the
knowledge, perhaps even at the behest, of Peter Munk
with whom I had corresponded on the subject previously.
I submitted a
50-page study for the benefit of Barrick
management, entitled Gold Mining and Hedging: Will Hedging Kill the Goose
Laying the Golden Egg?, written for the purpose.
It covered the subject of both unilateral and bilateral hedging. Jamie
promised that he would read it and let me have his comments in due course.
That was almost ten years ago; his comments never came.
I apologized to
Jamie for my mistake of stating that he was fired. I congratulated him on his
promotion. I told him that I would be happy to receive his comments on my
study even after a ten-year delay. I stated that an important public issue
was involved. We have to clarify the real distinction between proper hedging
that must be bilateral and limited, and fraudulent hedging that is unilateral
and unlimited.
Public challenge to Barrick
You might say that I
was issuing a private challenge to Jamie through Doug so that, from his
elevated position as Executive Vice President of the company, he could
authoritatively refute my charges that the hedges of Barrick
are fraudulent, and state his reasons why Barrick
did not take my advice, in setting up proper bilateral hedges that would not
commit speculators to the bear side of the market unilaterally and
permanently. If it had, Barrick could have avoided
horrendous losses and would have spared its shareholders from unending agony.
Jamie Sokalsky has not deigned to answer my private challenge
for half a year. So I take this opportunity to re-issue my challenge, this
time in the glare of full publicity.
I demand an answer
why Barrick ignored my recommendation of ten years
ago which I personally presented in writing to the then Chief Financial
Officer 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’
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, if only 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, already ten years ago. He and I discussed the subject
together at great length, and he received from me a Memorandum spelling 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.
Two world-class
companies, Barrick and Newmont, cannot be both
right when one insists that unilateral and unlimited hedging is a valid
management tool, and the other insists that it was a mistake from start and
puts its money where its mouth is: it covers all net short positions, by
taking the loss while it is not too late.
An appeal to analysts and accountants
I hereby invite all
gold share analysts and public accountants conversant with the dispute to
help adjudicate. We must know the truth. Shareholders have the right
to this information. Other people who are still vacillating between so-called
hedged vs. unhedged gold mining companies
also have the right to know the answer. It is not beyond science to provide
an unambiguous answer to the question what constitutes a valid hedge and what
does not. I pledge my sincere cooperation in this dispute and inquiry. I am
staking my reputation as a monetary scientist in this challenge. I am willing
to declare in advance that I shall abide by the verdict of a committee of unbiassed experts with impeccable credentials, even if it
rejects my claim that unilateral hedging (perpetual net short positions)
means taking of unacceptable risks with shareholder capital, while bilateral
hedging (balanced forward sales and purchases) is limiting risks and could be
potentially profitable. In fact it is the only permissible way of hedging,
since it does not permanently line up the very considerable speculative
following in the short camp, thus imparting an unacceptable bias to the bear
side of the gold market. The chips shall fall where they may only if the
hedge plan is bilateral and limited.
Gambling with the funds of widows and orphans
My challenge is
eminently reasonable. There is nothing frivolous about it. It is not
negative. While it is critical, it offers an alternative. My alternative has
been worked out in greater details than what Barrick
has ever revealed about its own hedge plan in public.
I may add that I
have been a student of gold since I immigrated to Canada in 1957 and could
have access to the literature that was denied to me in my native Hungary.
When the first gold futures market opened in Winnipeg in the early
1970’s, while it was still illegal for Americans to trade gold futures
contracts, I purchased a seat on the Winnipeg Commodity Exchange in order to
have first-hand access to information. I am a careful researcher, and I have
no axes to grind. I am interested in the truth, and nothing but the truth.
I am willing to
grant that the government of the U.S. has the right to defend the value of
its currency, provided that this defence is not based on outright fraud and
mass-deception. If
the solution to the problem of gold is to sell out the U.S. Treasury stock to
the last bar, as you often hear suggested in academic circles, then be it.
But selling unlimited amounts of paper gold, or unlimited amounts of unmined gold instead, thereby surreptitiously placing the
funds of widows and orphans in clear and present danger, is a procedure that
is blatantly unfitting to the government of a great nation with a proud
monetary heritage. Moreover, it is deeply immoral. It is contrary to
scriptural admonitions.
Barrick’s barracudas
I keep an open mind
about the dark suggestion that a conspiracy exists between the U.S. and Barrick to cap the gold price through a fraudulently
conceived and falsely promoted hedge-plan with the side-effect of deceiving
and harming innocent third parties. I shall continue doing so for a
reasonable length of time, as I want to give a chance to Messrs. Munk, Wilkins and Sokalsky to
examine my challenge and accept it. This is not a request to open the secret
minutes of Barrick’s Advisory Board, of which
such figures as former U.S. President Bush, former Canadian Prime Minister
Mulroney, not to mention several former heads of various central banks are
members, even though this body is unseemly to me as it evokes the epithet Barrick’s Barracudas. This is merely
a request to have a free and open academic discussion on the business
question what constitutes valid hedging and what does not. I claim to be an
expert on that question myself, as I have studied if
for several decades. But I will accept the verdict of my peers against me if
they can find a weak point in my reasoning.
It would please me
if we could dismiss the bogeyman of a conspiracy between the U.S. government
and Barrick Gold for once and all. Personally I
would be greatly relieved to have a confirmation of the fact that the world
is not governed by evil and vindictive men.
Declining or
ignoring my challenge would not be a slap in my face. It would be a blot on
the character of those who have done the ignoring.
„Most compelling catalys
for re-rating”
Earlier this year a
report appeared from the pen of Dorothy Kosich, www.web.com
: Citigroup Analysts tell Barrick: Close Hedge
Book, Then Stand Back. Reno, Nevada, February 14, 2007. Citigroup metals
analysts John H. Hill and Graham Wark urged Barrick Gold to reduce aggressively its hedge book or
repurchase it in its entirety — an action that could be „one of
the most compelling re-rating catalysts in the metals industry”…
Apparently, Barrick is not interested in re-rating.
Still less is it interested in the opinion of its shareholders. Could it be
that its real bosses are not the shareholders, but those who sit on its
Advisory Board? Shareholders, it seems, can only „vote with their
feet”.
Indeed they may and
will. As the saying goes, the real proof of the pie is in the eating. The
market will ultimately decide this issue as well. From the feedback to my
column on the Internet I know that present and prospective owners of gold
mining shares are deeply troubled by these issues, and they reject the
obfuscation that seems to be emanating from Barrick.
I want to put the resources of my Gold Standard University at their disposal.
I suggest to them that they should think twice before they buy Barrick stock, unless they are fully satisfied with its
response to my challenge.
In case of no
response, I have no advice whether to buy or to sell. The refusal will speak
for itself.
We are at the
cross-roads. People who seek protection in numbers will have to choose
between Barrick and Newmont. The record of the
so-called hedged gold mines appears dismal in comparison with that of the unhedged ones. Could it be that the former, in a
rear-guard action, want to save their own skin by refusing my challenge
because they know that by taking it up they would surely lose? I leave it to
my readers to figure it out.
Here is my parting
shot. Dr. Bernanke would not want to use Barrick as
the helicopter from which to dispense Federal Reserve notes. The notes would
end up in the wrong hands. No sooner had the Fed bought Barrick
stocks than speculators sold them.
Gold Standard University Live
Session Two of Gold
Standard University will take place between August 17 and 29, 2007, at Martineum Academy in Szombathely, Hungary. It will
feature a one-week course (13 lectures) entitled Gold and Interest, as
well as a blue-ribbon panel discussion entitled The Last Contango ─ Basis As an Early Warning Sign of the Collapse
of the International Monetary System. The second week is reserved for
sight-seeing and recreation, including the famous Savaria
Roman Festival featuring Roman togas and other habits, Roman cuisine,
Roman games, etc. Enrolment is limited; first come first served. For more
information please contact: GSUL@t-online.hu
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 EITHER BARRICK OR NEWMONT
STOCK, NOR DOES HE INTEND TO ACQUIRE ONE. THE CONTENT 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
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 21, 2002
Richard Rohmer, Golden
Phoenix: The Biography of Peter Munk, Key
Porter Books, 1999
A. E. Fekete, The Texas Hedges of Barrick,
www.goldisfreedom.com , May, 2002
Ferdinand Lips, Gold
Wars, Will Hedging Kill the Goose Laying the
Golden Egg? p 161-167,
New York: FAME,
A. E. Fekete, To Barrick Or To Be Barricked, That Is the Question, www.gold-eagle.com
August 11, 2006
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 Kark Sonnenblick
Bush abets Barrick’s Golddigging, by
Gail Billington
See also: http://american_almanac.tripod.com/bushgold.htm
Copyright © 2007. A. E. Fekete. All rights reserved
Antal E. Fekete
Professor,
Intermountain Institute of Science and Applied Mathematics, Missoula, MT 59806,
U.S.A.
Gold Standard University
aefekete@hotmail.com
Correction. It was incorrectly stated in my article The
Golden Thorn in the Flesh, Part Two, that a translation of Melchior
Palyi’s 1968 paper Gold Standard
and Economic Order from German to English was made by Dr. T. Megalli. In
fact, the article appeared in English in the original edition of the
Festschrift Geld, Kapital, und Kredit
(Stuttgart, 1968) honoring Heinrich Rittershausen on the occasion of his
70-th birthday.
Announcement. Session Two of Gold Standard University will take
place between August 17 and 29, 2007, at Martineum Academy in Szombathely,
Hungary. It will feature a one-week course (13 lectures) entitled Gold and Interest, as well as a
blue-ribbon panel discussion entitled The
Last Contango ─ an Early Warning Sign of the Collapse of the
International Monetary System. The second week is reserved for
sight-seeing and recreation. Enrolment
is limited; first come first served. For more information please contact: GSUL@t-online.hu
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