Antal Fekete on Barrick, and the fraud of hedging:
ted butler (@Message in a bottle) ID#370209:
Copyright © 2000 ted butler/Kitco Inc. All rights reserved
Here's an e-mail from Antal Fekete ( a retired Canadian Math professor ) to a friend who is writing a book on Barrick Gold. I thought it was well written, and I asked Antal if it was OK to re-post, and he said fine.
Dear Friend:
Thank you for your message. I take it that corrections and comments on the
second part of the July-version of your book are now irrelevant and I
should not forward them to you.
However, I would like make a suggestion concerning your reference to
Barrick. In addition to what you have already said on the questionable
dealings of that company, you may want to add the very serious charge that
it knowingly misleads shareholders, creditors, and the general
public. For several years in a row, in its Annual Reports, at its
shareholders meetings, and press conferences, Barrick has
been reporting consistently higher profits, attributing it to its ability
to realize higher prices for its newly mined gold than prices that were
bid in the markets during the entire year in question. These reports
of high profits have been duly certified by reputable accounting firms,
and they have never been questioned by academia, let alone the financial
press.
We all know what academia and the financial press would have to say if a
company with publicly traded shares would announce that it is
manufacturing and marketing the 21st century version of "perpetuum
mobile".
Barrick boasts that it could accomplish this miracle of consistently
selling gold at a price higher than the market has ever bid during the
entire year by the sophisticated tool of "hedging". Why not share this
"secret" with the American farmer? Would it not be wonderful if they,
too, could consistently realize higher wheat prices than the market is
willing to bid? Where are the farmers' organizations to demand that they
should also be told the secret of turning the stone into bread?
Barrick could not share its secret with anybody because the "miracle" can
only be accomplished by fraud. If one wants to be charitable, one would
assume that the accounting firms do not understand what they are
certifying. Otherwise they would not give their good name to this
chicanery aiming to mislead the public. Unfortunately, there are signs
that suggest otherwise. The accounting profession may be a full accomplice
in this conspiracy to defraud.
It is not, has never been, and will never be possible to sell gold forward
at a higher price than the highest price bid by the markets during the
year under review, any more than it is possible to turn lead into gold
profitably.
Here is what Barrick is doing. It sells gold, borrowed for long-term at a
low rate of interest, and invests the proceeds into high-yielding US
Treasury paper. Then it re-calculates its revenues boosted by the
interest income ( owing to the positive spread between the yield on
the Treasury paper and the gold rate ) as if it had been received through a
higher sale price on gold per ounce. Why is this a clear fraud? Because
the transaction remains incomplete, and profits are only "paper" profits,
as long as all the deals have not been closed out and the borrowed gold
returned to the owners. It may never be possible to realize those paper
profits. It is quite conceivable that these forward commitments can only
be closed out at hideous losses. For such a scenario nothing more drastic
needs to happen than for the price of gold to return to a higher level
where it has already traded for years or decades -- before the entire deal
is closed out and the borrowed gold returned.
Barrick simply assumes that "what goes up must come down". If the
gold price goes up, say, $200 per ounce, then it is duty-bound to come
down at least that much in due course. Those with financial staying
power, such as Barrick considers itself to possess in good measure,
will be able to ride out any storm caused by temporary spikes in the gold
price. They can roll over all futures contracts showing a loss, several
times if necessary, until the gold price comes down again. Barrick and
others will therefore always be able to close out their deals at a profit.
The truth remains, however, that all Barrick has accomplished is to have
swept margin calls on its gold-borrowings under the rug, thereby
concealing the potential liability from its shareholders and
creditors. Therein lies the fraud, which SEC and other watchdog agencies
of the US government should uncover and expose. Instead, they adopt the
"hear no evil, see no evil" attitude.
Barrick wasn't around in 1968. But suppose, for the sake of argument, that
it was. Assume further that Barrick had sold borrowed gold at $38 per
ounce ( which may have appeared as an incredibly smart thing to do
that year to the gold producers of the day ) . In that case Barrick would
still be rolling over its gold loans in the forlorn hope that the price of
gold will be good enough to drop below $38 and ounce, in order to enable
Barrick to unwind its losing position with a profit. But in fact, after
1968, the year the US Treasury defaulted on its obligation to pay its
creditors ( foreign central banks with short-term dollar holdings ) in gold
at $35 an ounce as contracted, the price of gold took off never to come
back again. Barrick could still be holding the bag of losses, and keep
reporting huge profits, because the conspirator bullion banks allow it to
roll over its short position in gold at $38 an ounce. It may be pointed
out that today the position of the US Treasury vis-a-vis its foreign
central bank creditors is far inferior to its position in 1968.
IT HAS HAPPENED ANY NUMBER OF TIMES IN HISTORY THAT THE GOLD PRICE
TOOK OFF, NEVER EVER TO COME DOWN TO THE LEVEL IT HAS STARTED FROM.
For this reason, any accounting assumption that a commitment to deliver
gold at a future date can be closed out profitably in the future ( if
only one is willing and able to wait long enough ) is simply fraudulent. It
should never be allowed in a society with self-respecting legislators
making meaningful contract laws. And the fraud should be exposed by
self-respecting accountants and other watchdogs of fair play.
Just as grain elevator operators are not allowed to treat, in their
balance sheet and income statements, the long positions they have in
the wheat futures markets in the same way as they treat wheat physically
present in their elevators, -- gold mines should not be allowed to
calculate and report profits on the sale of borrowed gold in the same way
as they calculate and report profits on the sale of newly mined
gold. There is a contingent liability on the long positions of a grain
elevator; for the stronger reason, there is a contingent liability on the
short positions of a gold mine. Until and unless these positions are
closed out, there is no profit to report. As the proverb says, "there is
many a slip between cup and lip".
It is to the eternal shame of our civilization that it allows this
unsavory conspiracy between the bullion banks, the gold mines,
the accounting profession, and the government ( with academia and the
financial press looking on ) to defraud the general public
through the hocus-pocus of "hedging" and forward selling.
Such blatant and ongoing abuse of trust is possible only under the regime
of irredeemable currency. A most powerful argument in favor of
the gold standard is precisely the one asserting that it will not
tolerate the perpetuation of abuses of trust in dealings among upright
men.
With the best regards,
Antal E. Fekete |
