AROUND THE MARKETS: Gold swings against hedgers
Jonathan Fuerbringer
The International Herald Tribune
Tuesday, April 30, 2002
The performance of Barrick Gold Corp.'s stock shows that the sentiment of the gold market has swung sharply against hedging.
Hedgers and anti-hedgers have been battling for years. Hedgers lock in the current price of gold plus a premium by borrowing gold, selling it and then investing the proceeds. They say this is good management and smart protection against a price decline. Anti-hedgers are more bullish on gold, saying hedging prevents a company from reaping the full benefit of a price rise. They talk much less about the downside risk.
The shift on hedging is important to gold investors, who can now be more certain that the stocks of anti-hedgers will have momentum if gold prices continue to rise. Those who advocate hedging - and who have done very well with their strategy in recent years - will be under pressure to do less of it. An increased focus on the gold price is likely to diminish concern for a company's fundamentals, and that is not a good long-term strategy for investors.
So far this year, the stock of Barrick Gold, the third-largest gold mining company and a leader of the hedging faction, is up 27.8 percent as the price of gold has jumped 11.9 percent. Sounds great. But the Chicago Board Options Exchange index of eight gold mining companies is up 42.4 percent for the year, and Newmont Mining Corp., the largest gold mining company and a leader of the anti-hedgers, is up 57.4 percent.
As the spot price of gold has risen - it hit a two-year high Monday at $312 an ounce - the argument against hedging has become so persuasive that an anti-hedging reputation is what really counts these days when investors pick gold stocks. Newmont has a large hedge position right now, gained with its February merger with Normandy Mining Ltd. of Australia. But that has not hurt Newmont shares. Barrick, meanwhile, has moved to be less hedged in the short term. It will now sell half of its 2002 production at spot market prices, shedding its practice of hedging all its current production. But that shift has not helped Barrick in the stock market.
"The distinction now seems to be drawn more along philosophical than factual lines," concluded the 2002 gold-market report released last week by Gold Fields Mineral Services.
The move away from hedging is clear. Last year, the amount of gold hedged plunged by 147 tons, after a modest 15-ton decline in 2000 and a 506-ton increase in 1999, according to Gold Fields Mineral Services.
Randall Oliphant, president of Barrick, said the battle over hedging was "a bunch of nonsense." But it is not, because it has an impact on his stock.
His problem is that Newmont gets a bigger benefit because it has more unhedged gold to sell this year. A $25 climb in the price of gold this year, to $325 an ounce, would mean $71 million in added revenue for Barrick but would bring Newmont $156 million.
- Jonathan Fuerbringer (NYT)
Copyright © 2002 The International Herald Tribune
iht.com |
