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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.
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.