How Barrick's hedging gold in a rising market could be a bonanza

1a ET Friday, September 26, 2007

Dear Friend of GATA and Gold:

Our friend Mitch writes:

"Can you explain to me how Barrick Gold will avoid any damage by holding its 9.5-million-ounce gold hedge book in a rising gold market? Today at his Internet site (www.JSMineSet.com) Jim Sinclair says Barrick will benefit from it. I don't see how you make money by being short via hedges in a gold bull market. Do you have anything to add? I find it all very confusing."

Dear Mitch:

If Barrick can repay the borrowed gold on its own sweet time, and can be sure of obtaining sufficient gold to do so, the company could make a lot of money with its gold hedging.

Here's the hypothetical.

Barrick tells the Treasury Department and the Federal Reserve that it would like to cooperate in the gold price suppression scheme of the Western central banks -- indeed, to be one of the central banks' main agents in the scheme, just as the company admitted in U.S. District Court in New Orleans in February 2003 that it was one of the scheme's main agents (http://www.lemetropolecafe.com/img2003/memoformotiontodis.pdf).

The Treasury Department and the Fed reply: "Sure, Barrick. We can do a gold swap with the Bundesbank and get you 9.5 million ounces of gold. Borrow this gold and sell it into the market upon our occasional signals. Use the proceeds to buy mining properties that can produce 50 million ounces of gold or so. (Have you looked around South America lately? There are some very prospective properties there.) The gold price suppression scheme may end around 2008 and the price of gold may get out of hand then, but don't worry. You don't have to repay the gold to us until 2015, by which time your new 50-million-ounce mines will be well into production and you can use that gold as repayment. Heck, maybe we'll let you off the hook by agreeing to cash settlement of your gold loan at a substantial discount some time before 2015."

Now, Mitch, if you had the chance to borrow 9.5 million ounces of gold to gain ownership of five or six times as much gold in the ground, with confidence that you could get enough of that gold out of the ground in plenty of time to repay the loan, or if you thought that you wouldn't really have to repay the loan in real metal at all, and if you were confident that gold would be worth a lot more in a few years, wouldn't you take the gold loan too?

In such a scenario, Barrick would go short 9.5 million ounces in order to go long 50 million ounces in the ground. If the Treasury and the Fed really are going to insist on repayment in metal of the gold Barrick borrowed, this gold might be the gold the Treasury had in mind years ago when its accounts started to refer to "deep storage gold" -- unmined gold due as repayment of Treasury gold loans. Indeed, the Metal Bulletin's story the other day disclosing the Bank of England's recent inability to produce "good delivery" gold for the London Bullion Market Association (http://www.gata.org/node/5536) quoted an anonymous expert source as saying the Bank of England now also has "deep storage gold."

If Barrick's gold repayment terms are as generous as the company long has said they are -- 15 years in duration and "evergreen" besides, always able to be extended another year -- the company has never undertaken any risk in borrowing all that gold. The risk has always been assumed by the central bank lenders, who would lend to Barrick on such fantastically generous terms only if the central banks were getting out of it something even more valuable to them -- like the surreptitious control of the gold market that is necessary to their deception of the currency and bond markets.

To accept such a scenario you need only to believe in the venality and dishonesty of the Western central banks -- which is the easiest part.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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