In Peak Gold! A Primer on True Hedging, Part Two Antal...

In Peak Gold! A Primer on True Hedging, Part Two Antal E. Fekete points out Fraudulent Hedging practices and a Double Standard related to gold. Let's explore those ideas. BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Antal E. Fekete points out Fraudulent Hedging practices and a Double Standard related to gold. Let's explore those ideas. In earlier papers I have explained that virtually all activities of gold mines that go under the name 'hedging' are fraudulent. To the extent hedges go out into the future more than one year, or they exceed the quantity of one year's production, they are naked forward sales, carrying unlimited risk (the risk that the gold price goes to infinity, as it has in the wake of every hyperinflation). Most 'hedged' gold mines are in violation of the important restriction that downstream hedges must not exceed one year's gold output and they must be lifted before the end of the fiscal year. Their practice transgresses not only the limits of prudence, but also the limits of upright business management. A gold mine selling forward in excess of one year's output is guilty of fraud. It is concealing a potentially unlimited liability. The accounting profession, the commodity exchanges, and the government's watchdog agencies have never offered an acceptable explanation for the double standard they apply, one for the gold mining industry, and another one for everyone else. While they allow gold mines to sell forward several years' production, they would immediately blow the whistle if, for example, an agricultural producer tried to do the same. There is no justification for this double standard. It is scandalous that the government grants legal immunity to gold mines using fraudulent hedges. ' is mistaken. As long as a miner has the gold to sell (or will have it to sell by the time the contract stipulates), where's the risk? The only risk is to potential profit. ' premise is based on the previous falsehood that forward selling is fraud and needs to be covered immediately. Two flaws in logic do not make a right. Profit risk is a genuine risk, but that risk actually runs in both directions. That's a point the article does not mention. Let's be honest here: No one really knows what the price of gold will be 5 years from today. And it is because profit risk runs in both directions (based on the future price of gold) that miners hedge for longer terms. It may not be smart to hedge long term (more on this a bit later) but it is neither fraudulent, nor inherently risky per se. In fact, a good case can be made that it has a tendency to reduce risk, if done smartly. Hedges are disclosed. If one does not like hedged miners, one does not have to buy stocks of hedged miners. In fact, if one believes that hedged miners are a fraud, one should be grateful for the opportunity to short such fraudulent companies. Comparing gold, silver, copper, etc, to agricultural commodities and seeing a double standard is simply begging for a rebuttal. Agricultural commodities are hedged from harvest to harvest and new crops have to be planted every year, but gold mine developments have lead times from 5 to 10 years and obviously don't have to be planted every year. Agricultural commodities are subject to drought, floods, disease, pestilence, soil depletion, etc., to a far greater extent than miners. Articles that find conspiracies lurking in every corner do far more damage than good to the gold investing community. There simply is no massive conspiracy to hold done the price of gold, there is no fraud in forward gold sales, and there are numerous reasons outlined above for longer term hedging of gold or silver or copper vs. agricultural commodities. Producers sell gold production. One way is by selling forward gold futures. Gold producers will always be short gold futures. There is no conspiracy there. And for every long contract, there must be a short contract. That is how the futures market works. So if there is a conspiracy by gold shorts, then there is an equal and opposite conspiracy by longs to force up the price of gold greater than known supply. Simply put, for every long gold future someone must be short a gold future. So where's the conspiracy? All this talk of gold shorts suppressing the price of gold proves is that people do not understand how the futures market works. Nor was there a conspiracy by the Bank of England (or any other central banks for that matter) to suppress the price of gold. Central bankers tend to be foolish. It's a disease. Yes, holding gold from $800 to $250 and then selling it was stupid. But where's the conspiracy? Stupidity by the Bank of England does not constitute conspiracy. Nor will there be a mad scramble by gold producers running for cover for the simple reason is all the producers have to do is mine the gold to fulfill the contracts. The idea that gold shorts are going to ' ' and that will drive the market higher based on the now discredited idea that hedging over one year constitutes fraud. This is how one bad premise leads to all sorts of subsequent misguided hypothesis. Besides, if gold shorts were going to drive the market way higher then why complain about it? I think the frustration comes in when the. But I am attempting to portray a balanced view that suggests conspiracies are not lurking behind every corner nor are conspiracies behind every move up or down in the price of gold. Now that Barrick Gold Inc. (ABX/NYSE, ABX/TSX) has fully eliminated its 'corporate' hedge book, rendering ongoing operations 100% exposed to spot gold prices, its time Canada's largest gold miner rid itself of the remaining 9.5 million ounces left on its 'project' hedge book, according to Citigroup analyst John Hill. Mr. Hill believes de-hedging would erase the discount valuation in the stock and add $3 to $5 per share to Barrick's net asset value based on expectations that gold will keep climbing. In fact it could even drive the gold price higher by $30 to $40 per ounce, the analyst added. Barrick, however, appears reluctant to unwind its 'project' hedge, choosing instead to view it as an important financing tool for projects such as Pascua-Lama in Chile & Argentina, Mr. Hill concluded, adding the hierarchy of capital allocation seems to be projects, dividends, buybacks then dehedging. Before going any further let me say that I am not a big defender of long term hedging per se, and certainly Barrick has made huge mistakes. Barrick could have and should have unwound hedges anywhere from $300-$400. And yes that is going to cost shareholders profit. But no, those hedges do not constitute ' When gold prices crashed from $800 to $250 many miners went out of business. A very good case can be made that Barrick stayed in business because of its hedges. That said, Barrick over-stayed its hedging welcome by a mile. So what now? I disagree with Hill that Barrick should cover those gold hedges now at $700. If they did, and the price of gold collapsed to $500, Barrick would be in a world of hurt. In essence, and after failing to cover at $250, $300, $350, $400, etc., Barrick would be betting the farm that prices are heading north of $700 and more importantly will stay north of $700 for quite some time. While that may (or may not) be likely, is it really worth betting the company on? ' have the option of buying physical gold or an unhedged miner like Goldcorp (GG) or Newmont Mining (NEM), and shorting Barrick (ABX) as a paired trade. No, I am not recommending this play. If anything I would advise against it. I am merely point out a trade for those who believe in fraud and various conspiracy theories. few seem to look beyond the myth of gold acting as an inflation hedge to the reality that gold is a better deflation hedge. ' that was pointed out by many was that the U. S. was on a gold standard in the great depression but is no longer on a gold standard now. ' ' is that gold has been money for thousands of years and gold is still money today. How do we know that gold is still money? The short answer is that in spite of what any government says, gold still acts like money. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.