Felix Salmon

Adventures in hedging, Barrick Gold edition

By Felix Salmon
September 9, 2009

The best kind of hedge is the one like Agustín Carstens put on in Mexico: he locked in high oil prices, and made billions when the price of oil fell. Sometimes, of course, hedges don’t work out nearly so well. Larry Summers, for instance, thought he was locking in low interest rates, but then saw rates fall even lower, and ended up losing billions of Harvard’s dollars.

And then there are the hedges which just don’t make any sense at all: like Barrick Gold, which locked in low gold prices and is now spending a whopping $3 billion to unlock them at the top of the market. Anybody care to explain that one to me?

6 comments so far | RSS Comments RSS

Barrick was hedging as an agent of the gold cartel to suppress the price of gold. This was a higher priority than turning a profit for their shareholders.

Posted by davekaps | Report as abusive

Two reasons. Barrick’s banks may have told it it had to hedge. The second is that earlier price spikes might then have looked like the top of the market.


You didn’t think earnings management stopped when Jack Welch retired, did you?

In fairness to Barrick, there is a certain logic to hedging what you produce: essentially guaranteeing yourself a specific profit over extraction cost. The problem is that when you use traded instruments, the full hedge is carried at its market price but you only accrue offsetting earnings as you deliver metal. So if the hedge becomes dramatically underwater – ie gold RISES – the negative value is immediately carried onto your balance sheet. Given enough time to produce the gold to match the hedge, you could unwind it, but in the meantime you trip all manner of covenants and risk the firm. You put it off and put it off, but at some point you need to bite the bullet and get rid of the hedge at any price.


What’s not to understand? They are getting their shareholders to pay $3b USD to free up 5,000,000 oz from their hedge books at $600USD, then they can turn around and sell for at least $950USD. Simple math… and no interest hanging over their heads like from a bond issue (granted they raised $750m USD earlier this year in bonds). So they will dilute 10% to add 20% to their cash-flow, so again, what’s not to understand?

If you don’t understand why the biggest gold miner in the world needs to hedge prices they you shouldn’t be writing finance. I think that the lower price range of the hedge speaks to how fast prices have shot up from the $500-600USD range (less than two years ago) to the $900-$1000USD (roughly since last summer), or up from ~$300 USD since 9/11. Or maybe that just speaks to how poorly the USD is doing compared to world currencies, give that Barrick is a Canadian company.

Posted by the Shah | Report as abusive

There’s no ‘simple math’ here, but a belief that the price they are paying to close out the hedges – $990/oz or so we assume – will turn out to be cheaper than the price they receive to deliver into them over the next few years. Is it a silly idea? They’e been doing this for about six years (the started with over 20 million ounces) and so far have largely (and overall) been proved right. Of course there will come a time…

Posted by John | Report as abusive

Ditto. Barrack appears to be the stooge of the banking cartel keeping gold down. $3 billion is a small price to pay. For details of how and why Antal Fekete gives great detail.
http://www.professorfekete.com/articles% 5CAEFHaveGoldBugsBeenBarrickedByTheUS.pd f

Posted by SouthSeaStu | Report as abusive

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