(GATA News, gold producers in turmoil) "If I owned ***, I would freak out."
(continuation of prior gata news si post)
The "Hannibal Cannibals" have suckered many of the gold producers into
"over hedging." That has resulted in an irresponsible exposure by some
of the gold producers to an upward thrust in the price of gold. An
entire Midas could be devoted to this subject. The essence of what
happened is that the self serving "Hannibals" sold many of the gold
producers "structured deals" that involved derivative instruments known
as puts and calls. These bullion dealers convinced these producers that
the price of gold could never go up for some time, so why not get a
higher hedging price with these "structured deal" plans. Gold producers
are miners for the most part, not finance wizards. If Goldman Sachs, J.P
Morgan, Chase Bank, Deutsche Bank, etc, all said it was good, then, it
must be good.
Over and over, producers would come out and tell the press that they
hedged "x" amount of forward gold production at a price that was way
above the prevailing gold price. Such a deal! What brilliant management.
Many of the gold producers became little more than glorified hedged
funds. Unfortunately, many of them did know not what they were doing.
Still don't.
And that brings us to the moment. The biggest gold producer in Africa,
Ashanti, is reeling and while it has incredible assets and done a
marvelous job of mining, it is caught in a derivative blow up. Their
only way out of their predicament is for the gold price to go down. I
repeat - they are hoping for the gold price to go down. Yes, this is the
"Theatre of the Absurd" revisited. Gold shareholders normally invest in
gold producers because they believe in the value of gold, like it as an
investment and want to profit from a rise in the price of gold and the
enhanced asset value of the companies.
Ashanti is not alone. Cambior, is on the ropes too. They are just the
ones that have come public at this point in time with their problems.
Sources tell me that Cambior is already in the hands of the banks and
that management is still there only to keep things going. Ashanti's fate
also belongs to the banks. They are in deep, deep trouble.
What is important to understand is that that many of the producers that
have these derivative "structured deals" on their books want the price
of gold to down right now so that they can unwind them without too much
pain. Many of them are telling money mangers that the option volatility
has risen so high that now is not the time to unwind these time bombs.
Wrong again! Now is the time. These companies must stop acting like deer
staring into the headlights of an oncoming car. Deer freeze, so have
many of the gold producers.
It is a recipe for disaster.
If they cover now, they might have to admit to shareholders, they blew
it. They might get fired because their performance will be so poorly
regarded. But, their companies will be saved and as the gold price
rises, shareholders will be rewarded for their gold investments, not
annihilated. Travesty must be avoided, even if some management that
acted irresponsibly must be axed.
I think it is very important not to trivialize the seriousness of the
situation. A highly respected technician I know just got a sell signal
on the XAU. How can that be? It can be because the XAU is loaded with
North American gold producers that have had a love affair with the
"Hannibal Cannibals."
Now for the gold technicals. They are extraordinarily BULLISH. The Comex
Commitment of Trader Report issued after the close on Friday was the
most stunning ever released. In 1993 the gold market rallied $80. At the
end of that gold rally, the open interest rose to 221,000 contracts and
the spec long position grew to 110,000 contracts. A big correction, then
ensued.
Yesterday's report showed the large specs to be net SHORT 22,000
contracts. The small specs are only net long 9,500 contracts. This is
mindboggling news. If 1993 is to be repeated ( there is no reason it
should not be), we have another $80 move up in the price coming -
MINIMUM - since the open interest on Comex is already close to 221,000
again, yet the specs are short, not long 110,000 contracts.
That would suggest $400 gold is coming - MINIMUM!
The trading action the past 3 days has been superb as the bears tried to
take gold down sharply early in each session, but the $315 area has held
with strong support surfacing in that vicinity.
Here is how I see it. A bullion dealer told a source of mine that he did
not see a great deal of covering yet by the big hedge funds. Time and
time again, I have stressed to you how short "the gold borrowing crowd"
are. AND MANY HAVE STILL NOT COVERED. That has to be so. The reason is:
every technical black box trading system going has to be long. It is
hard to fathom any that would have given a sell signal as of last
Tuesday. Who is short this market? Has to be the hedge funds in good
part and maybe one other big, big player.
After an $80 move, or big move of any kind like this, the commercials in
the Comex Commitment report would normally be short. Yet, now they are
long. Why? Doug Pollit of Pollit & and Co. in Toronto explains it well
and offers one possible interpretation. Historically, after such a
monster move, the commercials would be short the board against their
physical inventory. Because gold is in such tight supply now, the
commercials are long Comex and the gold OTC market against physical
delivery commitments. That tells you they don't have gold in their
basements like they used to!
On top of all this, many of the large cap gold producers need to reduce
their call exposure by buying them back or buying futures against them,
or both. There is a big mismatch for producers at the moment. They owe
money short (margin calls) against owning assets long. These margin
calls can eat some companies alive if they tarry too much and do not act
quickly. Those that wait for a "dip" will most likely be left standing
at the alter. The train will leave the station without them. They will
eventually be buying in a complete panic at much higher price levels.
So, we have the hedge funds that need to cover and the producers that
need to unwind forward sale "structured deal" hedge programs. That
represents powerful buying that has not hit the market yet. Lookout
above!
Fundamentals
Just as bullish as the technicals.
First, take a gander at the precious metals lease rates. They are 4 to
20 times normal as a group. That is an indication of tremendous physical
tightness. There is just not a lot of precious metal supply out there.
Note the platinum lease rates! Will the gold lease rate go that high?
The trapped gold shorts talk about new lending coming into market. Fine.
Who wants to borrow gold in this environment? Why take a one way trip to
the poor house? What producer is going to want to roll over its forward
sales? Shareholders are already besieging corporate headquarters around
the world trying to find out what their forward sale exposure is. I just
got word that Newmont Mining is conducting a hurried conference call on
Monday.
Allow me to give you a specific example of what is going on out there.
Take Barrick Gold. I know of several money managers who have called them
to get the lay of the land. Barrick tells them all is OK. Yap, yap, yap.
One spent 20 minutes on the phone with them about all of this. I just
happened to call him up after I learned that Barrick has written 3.2
million ounces of calls at a 360 strike price. 600,000 ounces for the
year 2,000, 600,000 for 2001, 600,000 for the year 2002, and 1.4 million
ounces beyond that. It would appear that this is in addition to their
forward sale position of 13.3 million ounces of gold sold forward thru
2001 at an average price of $385. This sharp money manager was unaware
of this Barrick written call position.
The volatility on these calls has skyrocketed. The bottom line of that
is that the prices of these calls that they have written has soared in
price. To buy them back now will be prohibitive. Not to buy them back
could be corporate suicide. Sources close to Barrick tell me that around
$325 Barrick's hedge book is neutral at the moment. That number can
fluctuate as it is partly a function of lease rates and call
volatilities. A gold price move well north of $325 could start to stress
the Barrick financial system. Every Barrick shareholder should know
about this kind of exposure. I can assure you that many Barrick
shareholders have no knowledge of their call position exposure. It is
only fair to ask for disclosure - the truth told and dangers exposed. If
you are a Barrick shareholder, I urge you to get on this fast before
tragedy is the name of the game. Speak Barrick! Stop postponing your
conference calls.
Bullion dealers are stressed out all over the world with margin call
problems. How much margin extension can they extend to all these gold
producers that are caught flatfooted? How many Ashantis might there be
out there? The manipulation of the gold market is backfiring on the
bullion dealers. They have boo booed. Corporate management of these
bullion banks are now livid. Firings and rumors of coming layoffs are
everywhere. The Board of Directors or CEO's are coming in and telling
bullion dealers to begin clearing out their positions and exposure. The
heat will only grow on these gold units. Then, who extends the margin
call money to the producers?
Barrick Gold has done well over the years because of its hedging. They
have flaunted that fact to the investment community. They may have
arrogantly stayed at the party too long It says the following in the
Wall Street Journal in an article about Barrick: " However, if the spot
price does rise above $385, Mr. Sokalsky (Barrick's CFO) said Barrick
has the luxury of deferring its forward contracts for as long as 15
years and instead selling its gold production at the spot price. That
means the company can wait for spot prices to return to lower levels
before returning its borrowed gold to the central banks.
I do not know exactly how all these deals work as they are very
complicated. What I do know is I can't believe a responsible CFO of a
gold producer can make a statement like this. If I owned Barrick gold, I
would freak out.
Thus far, Midas du Metropole's assessment of the gold market and what
should happen to the price of gold has been spot on. The proof is in the
pudding. To verify that is so, all one needs to do is go to the James
Joyce Library below and read all the past Midas commentary.
It is my opinion that the price of gold is headed for $600. What will
Barrick gold do in that case? What will its stock price do? If you are a
Barrick gold shareholder, it might be a good idea to ask that question,
NOW.
I am not trying to intentionally bash Barrick. I am trying to get
information out to the public domain so investors can be make their own
judgements about investing in gold producers based on the facts. I have
worked on this all year as long time Cafe members know all too well. The
mainstream U.S. press has been loathe to tell our side of the story, yet
have extolled the bearish gold market commentary of the "Hannibals
Cannibals."
Midas
All the best,
Bill Murphy, Chairman
Gold Anti Trust Action (GATA) gata.org
Le Patron, Le Metropole Cafe lemetropolecafe.com |
