Schedule of GATA events at New Orleans Investment Conference

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By John Dizard
Financial Times
www.ft.com
October 11, 2002

In what is often called the "Taliban" or "fundamentalist"
wing of the goldbug movement, Barrick Gold is reviled
as the Great Satan, intent on driving down the gold
price through its derivatives activities, in league with
either the Federal Reserve, or the Illuminati, or both.

Barrick's position, with which I have agreed over the
years, is that all it did with its gold short sales was
hedge its exposure to fluctuations in the gold price.
Its lenders, seeing more stable cash flows than
those produced by other mining companies,
provided the money for new mine development at a
low cost. This has all been blessed by Standard and
Poor's, which gives Barrick a highly respectable A rating.

The goldbug fundamentalists, however, believed that it
was Barrick's short sales that depressed the gold price.
Holders of physical gold (which they perhaps keep in the
dugout with their year's supply of canned food and AK-47
ammunition) were thus deprived of profits, along with
share owners in those gold mining companies who did
not hedge their production. Even as gold, the metal,
continued its long bear market, Barrick prospered. The
gold "Taliban" were forced into the caves of occasional
conferences and Internet chat rooms.

Now, for whatever combination of macroeconomic or
geopolitical reasons, the faith-based gold investors have
been doing well this year, with both the metal and the
stocks of lightly hedged gold mines rising in the
double-digits.

The rise in the gold price alone should not be unwinding
the Barrick story. If all the company was doing was
locking in future cash flows to meet fixed expenses, then
it still had much gold production available to sell at the
new, higher, spot prices. As Randall Oliphant, Barrick's
chief executive, says, "We are happy with a higher gold
price. That's what we live for."

A higher price is what any gold miner lives for. The catch
is that Barrick is only partly a gold mining company. The
other part is a large investment company whose accounting
codes probably cannot be broken by the National Security
Agency, let alone investors or journalists.

And here is the perceived trouble. Because there is a
circularity to Barrick's good credit rating, which allows
loosely covenanted hedging contracts that provide much
of its liquidity. If the banks who lend it gold bullion (for the
short-selling programmes), or cash, should decide to rein
in the terms of their lending, that could, in turn, reduce the
earnings, which support the rating . . . and so on.

That process might have already begun. I have been
studying the company's public announcements over this
year, an endeavour that would tax even a Jesuit professor
of logic, and my findings are as follows.

Barrick began using its Premium Gold Sales Programme
more than a decade ago. When most people sell gold
short, they have to leave the proceeds of the sale, earning
low interest, as collateral with the bank that lent the short-sold
gold. Barrick convinced the gold-lending banks to let it
manage the investing of gold sale proceeds. It has been
doing this in the "investment company" wing of the
corporation.

For most of the past decade it was not hard to beat the
interest rates offered to other gold short-sellers on their
proceeds. Barrick bought bonds, including corporate
bonds, using what are known as "total return swaps"
sold by investment banks. These allowed it to earn
higher interest rates without requiring Barrick to book
timely mark-to-market losses on the value of the bond
portfolio. Barrick also earned option premium income
by writing (selling) gold calls against its gold production,
because its banks didn't tie up that production as
collateral.

In the Premium Gold Sales Programme, the extra-high
interest and option premium earnings were laid on to
the price per ounce that the company received on
physical gold sales. Rather than break out the earnings
from its investment activities as a separate operation,
Barrick distributed them over each ounce of gold sold.
Then they were revealed as a higher "realised price"
than the rest of the gold industry could earn.

Earlier this year, Barrick started to back off from its
corporate bond investment programme. Holding corporate
bonds has become a little dangerous. Instead, the company
has had to hand over the cash proceeds from forward sales
to be managed by its banks and invested in vanilla interest
rate products. Someone, perhaps the banks, also decided
to curtail the option premium selling, maybe because it
reduced their own potential collateral.

In September, Barrick announced it had to lower "guidance"
for its 2002 outlook from 42-47 cents a share to 33-35 cents a
share owing to operating problems.

At a minimum, Barrick must break out its investment
operations in complete detail, along with the terms, including
margin requirements, for its hedge programme.