Back in November, when gold was red hot, I warned investors against making big bets on gold or gold-related assets in the 4th quarter of 2009. I was on target here. During the week of that writing (November 16-20), gold was trading in the $1,130-$1,150/oz. range. It hit a peak of $1217.40 on December 3, and as of the close on January 29, it’s back at $1081.80. So too, Barrick Gold (ABX), the world’s largest gold producer, opened at $43.35 a share on November 20, hit a peak of $48.02 on December 2, and now it’s down to $34.82.
I believe that at current price levels Barrick shares represent a good value. There are reasonable arguments in support of gold’s long-term prospects, particularly because of potentially increased demand from emerging nations. However, many of the medium-term risks to gold investing I outlined in November—that the Fed will eventually raise interests and that hyperinflationary fears are exaggerated—remain. But Barrick’s faster than initially planned closing of its hedge book—contracts to sell gold that reduce exposure to the company if gold prices tank—has at least so far positioned Barrick to profit before that turbulence hits. Supporting that thesis is that Barrick’s CEO Aaron Regent acknowledged back in November the prospect that gold could experience a sell off, though he did not see prices falling below $900/oz.1 If Regent is running Barrick based on the same assumptions in his public statements, the decision to close the hedge book should yield healthy profits for Barrick if gold continues to hold above $1,000/oz.
Barrick, founded in 1980, only became the world’s leading gold producer in 2006 with its acquisition of Placer Dome. Its practice of hedging against falls in the gold price goes way back in the company’s history,2 so Barrick’s full profit potential with gold at $1,000 has not yet been proven to the market. While spot gold has declined about 5% since its November 16-20 trading range, Barrick shares have fallen 27%, to some extent pricing in market fears that gold will fall. I believe this differential provides a good opportunity for investors who want to round their portfolio with gold-related assets to buy into an equity that has potential to appreciate even if gold itself runs in place.
Disclosure: The author is long on Barrick Gold (ABX) as of the original publication date of this post.
- “UPDATE 1-Barrick chief says sell off in gold possible-FT,” Reuters, November 11, 2009, http://www.reuters.com/article/basicMaterialsSector/idUSSP46116320091112. [↩]
- See “Barrick Gold,” Fundinguniverse.com, at http://www.fundinguniverse.com/company-histories/Barrick-Gold-Corporation-Company-History.html. [↩]