Gold Outlook — Boil and Trouble

Yesterday, gold and silver slid lower after the Federal Reserve released its Beige Book report on the economy. Perhaps the U.S. dollar is getting a bid on improved estimates for economic recovery, though the greenback is weak again this morning.

I need to draw your attention to a story that broke a couple days ago …

Barrick to Sell $3 Billion in Stock to Buy Back Hedges

Barrick will spend $1.9 billion to eliminate all of its fixed-price gold contracts — on which the company effectively lost money every time the gold price rose — by buying gold on the open market and delivering it into the contracts.

It will also pay $1 billion to eliminate some of its floating spot price contracts — the liability on which does not change with fluctuations in the price of gold — leaving about $2.7 billion of floating hedges on the books.

XX Sean’s note –  Barrick’s hedge buy-back amounts to about 4% of annual global gold production. Not a lot, but maybe enough to act as a “put” and give support to the gold price.

Jesse at Jesse’s Café Américain raises some interesting points about Barrick’s move …

1. Barrick Gold and their bullion bank partner J.P. Morgan were the target of lawsuits by the gold bulls for price manipulation through the use of forward sales in their hedge book
2. The media showed a complete lack of interest in the story. But you can read documents pertaining to this here and here.
3. One of the current largest holders of the gold ETF (GLD) is now reported to be J.P Morgan, which is also a holder of one of the largest short gold positions on the COMEX.
4. Last year, it was revealed that the rules of the exchange would allow holders of short gold positions to make delivery good in the GLD ETF rather than in physical bullion.

I think Jesse raises some excellent points. Now, what does it all mean? Obviously Barrick thinks gold is going to get more expensive. But is it because of rising demand … or falling supply? Specifically, could the gold bugs who say the GLD (GLD: 110.34 0.00 0.00%) does not have all the gold it says it does actually be right?

It’s a scary thought, if true. It would be pretty bullish for gold, though.

Here’s another view on why Barrick is closing its hedge book.

Speaking of bullish for gold …

Gold Rally Signals Move Away From Currencies, Greenspan Says

Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said. The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.

Gee, ya think?

Finally, let’s look at a chart of gold.

You can see that gold is pulling back to test its breakout.  This still isn’t the pullback that I’ve been talking about in my premium services. Be patient.  The non-precious metals picks I recommended yesterday should have some “oomph”, and offer a nice alternative while we wait to see if gold will follow the script.

Related Posts

• Warning on Paper Gold (09/20/09)
• Gold Soars! GDX Breaks Out! Zoom-Zoom! (09/02/09)
• Is “Large-Scale” Gold Buying Coming? (09/24/08)
• GLD Gold Chart Analysis (10/08/09)
• Most Tax Efficient Gold ETFs (11/20/09)