The Last Gold Bears Have Thrown In the Towel

After more than two decades of play in the grand casino of gold hedges, Barrick Gold (NYSE: ABX  ) is preparing to relinquish the dice.

The practice of contracting future gold sales within predetermined price ranges worked well for Barrick once upon a time, boosting the company's superstar status with a more stable (and often well-enhanced) revenue stream. As this bull market for precious metals gathered momentum, however, Barrick's hedge book exploded into a monster ... significantly reducing the miner's upside exposure to the price of gold.

Barrick Gold will now swallow a painful pill to rid itself of these underwater gold gambles. The miner will take an enormous $5.6 billion charge on its third-quarter results as the hedges are moved onto the balance sheet.

Another hit to shareholders comes in the form of dilution, as the largest equity offering of 2009 outside the financial sector raises $3 billion in capital to cancel hedge contracts. Specifically, Barrick will allocate $1.9 billion to cancel its entire fixed-price hedge book, covering 3 million ounces of forward gold sales. Another $1 billion will cancel a portion of floating-price contracts, leaving behind a reduced hedge book liability of $2.7 billion.

Barrick may purchase gold on the open market to settle contracts, potentially bolstering the already robust demand environment for gold bullion. Citigroup metals analysts suggested back in 2007 that a move like this from Barrick would bolster near-term gold prices and signal that "the last bears have thrown in the towel."

Although rivals Randgold Resources (Nasdaq: GOLD  ) and AngloGold Ashanti (NYSE: AU  ) remain constrained by hedges, Barrick's bold move to target full exposure to the spot market just as the metal flirts with the $1,000 mark conveys a new level of confidence in the longer-term trajectory of this bull market for gold.

Barrick anticipates that "global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies." This Fool agrees, and sees rapidly mounting evidence of a crisis of confidence in the U.S. dollar.

Better late than never
While I applaud Barrick's strategic decision to cancel gold hedges, rival Newmont Mining (NYSE: NEM  ) took the plunge into full spot market exposure more than two years ago.

I've added Barrick to my silverminer CAPS portfolio just for fun, but I see no need for investors to swallow a dose of hedge-clearing medicine when miners like Goldcorp (NYSE: GG  ) , Agnico-Eagle Mines (NYSE: AEM  ) , and Yamana Gold (NYSE: AUY  ) already offer full exposure to gold's next monster move.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 44 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines and Yamana Gold. The Motley Fool's disclosure policy is 0.999 pure.


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  • Report this Comment On September 11, 2009, at 5:28 AM, bourse wrote:

    I will never fully understand why Barrick waited until today!

    Everyone is so positive about gold in these days. This makes me a little nervous.

    But on the other side all the robust demand which comes from the Asian forces you mentioned in your article of Sep04 are not simply market participants positioning themselves for the next days. Those are big political and strategic moves which do not depend of daily price swings!

  • Report this Comment On September 11, 2009, at 9:43 AM, ndfaninsb wrote:

    Didnt Yamana have hedges too and thats why they didnt make much last quarter?

  • Report this Comment On September 11, 2009, at 10:52 AM, XMFSinchiruna wrote:

    nd,

    A complicated question. Yamana has/had no gold hedges. What they did have were derivative hedges designed to reduce volatility of foreign exchange impacts over time. These derivatives proved costly indeed last quarter, but they are not gold hedges.

    http://www.fool.com/investing/general/2009/08/05/the-incredi...

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