Hedge-Trimmers Get a Haircut
By Jon Nadler
prices climbed back above the $1,000 mark in
overnight trade, after reports showing that
China’s economy is on an apparently stronger
than strong track motivated global investors to
once again seek riskier, and/or higher yielding
assets. Global stocks rose to eleven-month
highs, commodities rose along with them, and the
US dollar sank further on the trade-weighted
index as the aforementioned quest for returns in
other markets left it wanting for buyers.
Additional data, this time from the US, kept
pressure on the greenback as the morning trade
got underway in New York today. Specifically, US
imports rose at twice the expected rate –likely
as a result of the flood of imported autos
destined as clunker replacements- and sent the
American currency to the 76.66 level which now
shows a 2% loss for the week.
New York’s spot bullion gold price opened with a
$4.50 gain this morning, and was quoted at
$1000.90 per troy ounce. As trading commenced,
the dollar index was trading at 76.61 and crude
oil lost a little more than a quarter, quoted at
$71.68 per barrel. Gold ETF GLD holdings
remained static for a fourth day, at 1077.63
tonnes. Silver prices rose 13 cents to reach
$16.80 per ounce, while platinum climbed $4 to
$1289.00 an ounce.
Palladium showed no change and continued at $290
per ounce. “Cash for clunkers” has now morphed
into ‘cash-back guaranteed’ over at GM. The firm
announced that any buyer who is dissatisfied
with their GM-brand purchase can return the
vehicle to their dealer within 60 days. The
newly reborn automaker benefited less from the
auto trade-in stimulus plan last month than did
rival Ford and/or arch-rival Toyota.
Shortly after the open, precious metals matched
and/or took out their February highs, motivated
by further declines in the US dollar. Previously
mentioned targets for the dollar-euro rate at
1.46 were achieved and have given rise to
‘what’s next’ type of questions from trading
quarters we surveyed.
Gold traded as high as $1013 before pulling back
to $1007, silver vaulted to $16.84 an ounce, and
platinum leaped above $1300 (by $5) showing a
$20 gain. Conflicting reports of Coast Guard
shots being fired at a vessel on the Potomac
River rattled market nerves for a brief time.
The dollar index was last seen at 76.59 whilst
oil rose 45 cents to $72.39 per barrel.
In the interim, Treasury Secretary Geithner
outlined that which one would have expected to
be outlined shortly after the G-20 meeting; the
blueprint for the next phase of official
activities. Mr. Geithner let it be known that
the passage of the crisis stage brings with it a
new strategy by the Fed and the Treasury.
Whilst expecting that the US and global
recoveries will be fraught with ‘more than the
usual ups and downs’ the Secretary indicated
that the time has come to ‘unwind the
extraordinary programs that were put into place
during the crisis.’ He also intimated that the
mopping up and removal process would be
dependent -in both strength and pace- on
manifest economic conditions as time goes by. No
sudden moves, in so many words.
Much opinion-flavoured noise has recently
accompanied the decision by Barrick management
to stop all gold hedging. Gold perma-bulls have
hailed it as the sign of the ‘all-clear’ signal
for the lunar gold mission. Yes, this is the
same Barrick that had once been sued for
allegedly ‘illegally manipulating’ the gold
price via its hedging programmes. And, the
announcement came at a time when the trend
towards hedging shows real signs of life.
Many an analysis (BNP Paribas VMFortis, GFMS,
CPM, etc.) reveals that the de-hedging
programmes in force in recent years are drawing
to a close, or are shortly expected to do so.
Now, we know that you just have to have read a
plethora of commentaries that hail the firm’s
decision as nothing short of the catalyst and/or
reflection of gold’s second (or fourth?) coming.
What you may very likely have missed however,
are some equally incisive blogosphere
commentaries to the contrary. We bring you just
two of them (and remember, these are opinions –
just like all of the other writings), for the
sake of balance, courtesy of the Globe and Mail.
First, excerpts from MSN Money blogger James
“The hedges basically commit the company to
selling gold at specified prices. The idea is to
guarantee consistent cash flow for the company.
But as the price of gold has increased, the
hedges forced Barrick to sell gold at less than
Succumbing to shareholder pressure, management
claimed that its gold hedges had weighed down
the valuation of shares in a rising-price
By closing the hedges, Barrick can get more for
its gold and more for shareholders – if the
price of gold keeps rising. In effect, this is a
huge bet on $1,500 or $2,000 gold. Stop me if
you have heard this before: An investment fails
to perform for several years, often
irrationally. Then, just when investors give up
on the trade, the trade turns.
This move is either the company's brightest move
ever or one of the most insanely dumb thing any
company has done ever. I vote for the latter.”
Next up, Seeking Alpha’s blogger Chad Brand’
“As you may have seen, gold prices have risen
sharply in recent weeks (chart below) and now
trade near $1,000 an ounce for the third time
over the last couple of years. The metal never
seems to stay over $1,000 for long, even in the
depths of the credit crisis. Barrick has
decided, seemingly based entirely on pressure
from shareholders to go 100% long on gold just
as the metal is nearing its all-time high. I
thought we were supposed to buy low and sell
Barrick is going to pay $5.6 billion to lift its
hedges, which is the mark to market loss it has
on the books right now. On 9.5 million ounces,
that means the company is underwater by $589 per
ounce and must pay that much to get out of them.
That means Barrick is partially hedged at $411
per ounce with gold at $1,000.
Why not wait for gold to drop to $800 or $900
before lifting the hedges? That would be a “buy
low” type of move and even buying at $900 per
ounce would save the company $1 billion in cash,
versus making this move right now.”
The National Post reported this morning that
Barrick shares rose C$1.28, or 3.2%, to C$40.99
on Thursday in Toronto Stock Exchange trading.
The shares have declined 8.3% this year. Barrick
is the third-worst performer this year on the
Philadelphia Stock Exchange Gold and Silver
Index. The company also announced that it will
be seeking to invest in higher-risk areas in its
quest for metal and profits (see yesterday’s
commentary on “Risky Business” in certain parts
of Africa). By comparison, Vancouver- based
Goldcorp Inc., the second-largest producer of
the metal, has risen 15% in 2009.
And the beat goes on…
Polled traders in Europe had these thoughts to
offer to our friends over at GoldEssential.com:
One London-based trader said in an interview
that “volumes so far have been relatively light,
although with decent two way trading making up
for a narrow range”. He added to be still
looking for a close above the figure in order to
unlock further upside next week.
“The bounce off the $985 support mark on
Thursday showed that the stuffing has not yet
been knocked out of gold”, he said, adding that
a short-term overbought condition had mostly
been unwound as gold hovered sideways for much
of the last week.
A technical analyst at a major German bank added
that “a weekly close above the $1,000 would be a
bullish item, but that short-term confirmation
of further gains was still to be seen above
$1,010 and $1,030.80”.