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--- Begin Message ----Caveat Lector- 1:19a ET Sunday, March 2, 2003Dear Friend of GATA and Gold: Barrick Gold's lagging share price and Blanchard & Co.'s antitrust lawsuit against Barrick and J.P. Morgan Chase for manipulating the gold price made a big story in today's New York Times, which is appended here. Note particularly the description in the Times story of Barrick's "spot deferred" forward sales of gold, apparently based on information provided by Barrick itself. It often has been reported elsewhere that Barrick could postpone for as long as 15 years its repayment of this borrowed gold. But the Times story says Barrick can postpone delivery virtually forever: "In addition, if the dealer agrees, Barrick can 'reset' the time limit every year, starting the clock over on the 15-year deadline. If the dealer refuses, which Barrick says has never happened, delivery would be required 14 years later." That is, Barrick's counterparty has never refused to postpone repayment of its gold loans. Now who possibly wouldn't mind if a gold loan was never repaid? Certainly not a conventional financial institution. But maybe a central bank whose first objective was to suppress the gold price through intermediaries like Morgan Chase and Barrick? Maybe the author of the Times story, Kurt Eichenwald, could be persuaded to look into the gold story a little deeper -- starting with the question of exactly who wouldn't mind if Barrick's gold loans are never repaid. CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. * * * Gold is on the rise, so what's bugging Barrick? By KURT EICHENWALD The New York Times Sunday, March 3, 2003 http://www.nytimes.com/2003/03/02/business/worldbusiness/02GOLD.html The economy is in the doldrums. The stock market is a mess. War looms. Terror threatens. In other words, it should be time to celebrate at companies in the business of mining gold, long a haven in periods of investor anxiety. But one of the industry's largest players, Barrick Gold of Toronto, hasn't been popping any Champagne corks of late. After years of top performance, Barrick's stock price has slid, falling nearly 11 percent over the last year, as prices for gold have soared nearly 18 percent. Randall Oliphant was recently shown the door as chief executive and replaced by another longtime Barrick executive, Gregory C. Wilkins. Now, Barrick has been sued by a gold dealer and gold investors who say its success of the last decade relied on manipulating gold prices. At the foundation of many of its troubles is a wide perception among investors that Barrick is not set up to take advantage of a rising market because of its strategy of locking in prices for future gold production. That strategy — known as taking a hedge position — has been used by Barrick for some 15 years, and company executives credit it with bringing in some $2.2 billion of additional profit during that time. As the industry's glitter returns, investors fret that the hedging strategy might turn Barrick's gold into dross. "By far the biggest imputed liability to the stock price we estimate is related to concerns about the hedge book," said Chad Williams, a mining analyst at Westwind Partners, an independent institutional brokerage firm in Toronto. Indeed, in a recent conference call, Mr. Wilkins acknowledged that Barrick's hedge had become something of a "lightning rod" among investors. But company records, as well as interviews with mining and finance experts, suggest that the strategy will not have the negative impact on Barrick's near-term financial performance that investors fear. Ultimately, Barrick's largest risks come from the legal challenge it faces and from issues like production, lease rates for gold and whether it will miss out on a higher price a decade into the future. Barrick is cutting back the size of its hedge position. It now has about 20 percent of its 86.9 million ounces of gold reserves committed to hedges, down from about 26 percent last June, according to Jamie C. Sokalsky, its chief financial officer. Still, for gold bugs, who approach investment in gold with a fervor bordering on religiosity, the use of any such hedges, which entail the sale of borrowed gold into the spot market, is a heresy that damages the marketplace. Hedgers, led by Barrick, have warred with nonhedgers for years. Recent events have only fueled the debate. With a strategy described in exotic terms like "off-balance sheet position" and "fixed-forward contracts," the hedge program sounds the way the kind of toxic ploys used by Enron did. For conservative gold investors, they are the equivalent of the investment bogyman. "As a percentage of Barrick`s total assets, its off-balance-sheet assets make Enron look like a champion of full disclosure," said Donald W. Doyle Jr., chief executive of Blanchard & Company, a gold dealer in New Orleans that is the lead plaintiff in the suit against Barrick in Federal District Court there. Barrick insists — and numerous analysts agree — that its strategy is far simpler and more adaptive to market conditions than investors seem to believe. It begins with a contract between Barrick and a large bullion dealer, like Citigroup or J.P. Morgan Chase. Under the terms of the contract, Barrick is required to deliver gold at some future date. The contract, known as spot deferred, allows Barrick to postpone delivery, however, for up to 15 years. With the contract in place, the bullion dealer then leases that same amount of gold from a central bank, selling it in the spot market. The dealer then effectively places the cash from the sale on deposit, where it earns interest. During the contract's life, the dealer pays interest to the central bank as a fee for borrowing the gold. Once Barrick delivers the gold, it receives the cash from the spot sale and the accumulated interest, less the lease rate and certain fees paid to the dealer. That can give Barrick strong protection against a falling market. If the spot price is $300, for example, the hedge strategy could lock in a price five years in the future of about $345. If the spot market is higher than that price, Barrick can sell its gold there and defer the delivery against the contract. As a result, Barrick, on average, has made about $65 an ounce above spot market prices on gold sales the last 15 years, the company said. Barrick, which analysts say has the mining industry's highest credit rating, has been able to gain particular advantages in its deals with bullion dealers. It is allowed to deliver gold against its hedging contracts at virtually any point, whether in 2 days or 15 years. In addition, if the dealer agrees, Barrick can "reset" the time limit every year, starting the clock over on the 15-year deadline. If the dealer refuses, which Barrick says has never happened, delivery would be required 14 years later. Most important, Barrick does not have to post cash — known as margin — if the price of gold rises significantly. It is those features that make Barrick's program far different from hedging efforts that have hobbled other gold producers. For example, in 1999, when gold prices spiked unexpectedly, margin calls and other immediate financial consequences brought Ashanti Goldfields of Ghana and Cambior of Canada close to ruin — troubles that the Barrick program is structured to avoid. None of this is free of risk. If gold's spot price rises above the hedge price for more than a decade, Barrick would be forced to sell its gold for less than its nonhedged competitors would receive. Moreover, the bullion dealers could demand delivery if Barrick violated certain financial and performance requirements — for example, if a disaster occurred at its production facilities that impeded its ability to deliver gold. The hedging strategy also now faces a legal challenge. In the federal lawsuit filed late last year, Blanchard and the other plaintiffs accused Barrick of using its hedge program to manipulate gold prices in violation of federal antitrust laws.In essence, the lawsuit says Barrick and J. P. Morgan Chase, which has participated in the hedge program for years, used the strategy to force down prices, allowing them to profit at the expense of other market participants. "If you look over the past six years, you will see that when Barrack's hedge position has gone way up, the price of gold has gone way down and vice versa," said Mr. Doyle of Blanchard. "Barrick created an anticompetitive environment through the manipulation of the price of gold, and they did it with the knowledge and assistance of J. P. Morgan and perhaps some of the other bullion banks. "With the hedge program bringing future sales of gold into the immediate spot market, Mr. Doyle said, Barrick had the ability to cripple any rally in the price of the commodity." Because the program also allowed it to profit in markets that left competitors in poor shape, he said, Barrick was able to use its competitive advantage to acquire other companies, fueling huge growth. So while he is no fan of Barrick, Mr. Doyle says investor concerns about the hedge program's impact on the company are misplaced — a conclusion largely based on his belief that Barrick still has the power to manipulate prices. "The risk to the company from the price of gold going up is not all that great so long as Barrick still has the ability to push the price back down again," he said. A spokesman for J. P. Morgan Chase declined to comment. Barrick, which has formally notified Mr. Doyle that it intends to file a slander suit against him and Blanchard, dismissed the accusations in the suit as nonsense. "Eighty percent of our gold is not subjected to any hedge, so we are delighted with gold prices rising," said Mr. Sokalsky, Barrick's finance chief. "For us to hope against the value of our commodity going up would be crazy. "Moreover, antitrust experts who reviewed the Blanchard complaint said that they did not hold out any expectation that the suit would be successful, primarily because it misapplies antitrust laws. "The antitrust laws are here to protect competition, not competitors," said James Mutchnik, a partner at Kirkland & Ellis in Chicago and a former prosecutor with the antitrust division of the Justice Department. The plaintiffs "are complaining of lower prices in the market, and that is exactly what the antitrust laws are trying to accomplish, which is to benefit consumers rather than gold retailers." he said. Mr. Doyle said the antitrust claim was also based on what he described as Barrick's ability to use the hedge program to drive up prices at particular times, essentially by announcing its intention to suspend its use. "With their spot-deferred contracts, they were in the position to push up the prices periodically," he said. But some analysts said that proving that Barrick's hedge program significantly affected gold prices long term would be challenging because of the many factors underlying them. "Anyone with a legitimate understanding of how the U.S. dollar-denominated gold price is derived would not target any producer or any central bank for manipulating it," said Mr. Williams of Westwind Partners, which receives no banking fees from Barrick. The price, he said, "moves mostly on the U.S. economy, interest rates and inflation."Indeed, it was signals from such economic indicators that led Barrick to cut back its hedge position, according to Mr. Sokalsky. Hedging "is a tool as opposed to a religion for Barrick," he said. "And we have been adjusting it to reflect changing economic and financial situations. And with the gold price going up, the reduction of our position has been a good decision, in hindsight." ---------------------------------------------------- To subscribe to GATA's dispatches, send an e-mail to: [EMAIL PROTECTED] To unsubscribe, send an e-mail to: [EMAIL PROTECTED] ---------------------------------------------------- RECOMMENDED INTERNET SITES FOR DAILY MONITORING OF GOLD AND PRECIOUS METALS NEWS AND ANALYSIS Free sites: http://www.jsmineset.com http://www.theminingweb.com/ http://www.gold-eagle.com/ http://www.kitco.com/ http://www.usagold.com/ http://www.GoldSeek.com/ http://www.goldenbar.com/ http://www.silver-investor.com http://www.thebulliondesk.com/ http://www.sharelynx.net http://www.mininglife.com/ http://www.financialsense.com http://www.goldensextant.com http://www.goldismoney.info/index.html http://www.depression2.tv www.minersmanual.com/minernews.html Subscription site: http://www.lemetropolecafe.com/ Eagle Ranch discussion site: http://os2eagle.net/checksum.htm ---------------------------------------------------- COIN AND PRECIOUS METALS DEALERS WHO HAVE SUPPORTED GATA AND BEEN RECOMMENDED BY OUR MEMBERS Centennial Precious Metals 3033 East 1st Ave. Suite 403 Denver, Colorado 80206 www.USAGold.com Michael Kosares, Proprietor US (800) 869-5115 Canada 1-800-294-9462 European Union 00-800-2760-2760 Australia 0011-800-2760-2760 [EMAIL PROTECTED] Colorado Gold 222 South 5th St. Montrose, Colorado 81401 www.ColoradoGold.com Don Stott, Proprietor 1-888-786-8822 [EMAIL PROTECTED] Investment Rarities Inc. 7850 Metro Parkwa Minneapolis, Minnesota 55425 http://www.gloomdoom.com Greg Westgaard, Sales Manager 1-800-328-1860, Ext. 8889 [EMAIL PROTECTED] Lee Certified Coins P.O. 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