Dow Jones, Wednesday, December 18, 2002 at 18:22
By Lynne Olver
Dow Jones Newswires
VANCOUVER -- News of an antitrust lawsuit being brought by U.S. retail gold dealer Blanchard&Co. against Barrick Gold Corp. (ABX) and JP Morgan Chase&Co. (JPM) is being dismissed by some equity analysts as a publicity gimmick.
Shares of Barrick fell in Toronto and New York early Wednesday afternoon after Blanchard&Co. announced its legal action. Barrick recovered from an intraday low of C$23.46 to close at C$24.45, down 0.8%. The Toronto market's gold index was up 2.8%.
"The market impact you already saw,"Barry Allan of Research Capital said, adding that he believes the stock market will come to view the lawsuit as opportunistic."Why now? Why now, if this has been going on for so long? It's only now that hedging has become unpopular,"because the gold price is rising, Mr. Allen said."It just strikes me as being very sensationalistic.
"As reported, Blanchard&Co. claims that the Toronto-based gold producer and JP Morgan teamed up to manipulate the price of gold. Blanchard, which deals in coins and gold bars, claims that the gold price should actually be at about US$740 an ounce -- or US$760 counting inflation -- if the market had been able to respond to the"normal laws of supply and demand.
"In a statement, Barrick called Blanchard's allegations"ludicrous"and"totally without merit."JP Morgan Chase hasn't commented on the lawsuit.
Doug Pollitt, an analyst with Toronto brokerage Pollitt&Co., hasn't seen the complaint filed by Blanchard, but said he doesn't expect it to be a major irritant for Barrick."We don't think this is foremost among their problems,"he said."It seems to be a bit of a publicity stunt,"Mr. Pollitt added, pointing out that there are few rules in the commodity markets, especially rules about protecting hedging positions.
Another mining analyst, Chad Williams of Westwind Partners in Toronto, said he believes the lawsuit is a marketing ploy, but one that has added to the"aura of uncertainty"around Barrick and its hedging program."Our view is that this (suit) is a blatant illustration of a group that really doesn't understand the fundamentals of gold"and its relationship to the U.S. dollar, Mr. Williams said.
Mr. Williams said that anyone who bothered to investigate the publicly available information about Barrick's hedgebook wouldn't come to the same conclusion as Blanchard&Co. apparently did.
Mr. Williams just completed a study of gold hedging, in which he delved into Barrick's hedges as a case study. He concluded that Barrick's hedgebook is"very straightforward"although investors may be turned off by some complex language."For example, there are no instruments that we consider exotic or deceptive,"he said. Mining companies face a low level of financial risk in hedging, as long as their mining operations are dependable, while bullion banks shoulder the greatest proportion of financial risk involved in gold hedging, he concluded.
Conspiracy theories about the gold market abound and are nothing new, others noted, pointing to the Gold Anti-Trust Action group or GATA, which has complained for several years about a global price-fixing scheme.
Kerry Smith, an analyst with Haywood Securities, said a lack of disclosure by gold producers about their hedging contracts, and a lack of investor knowledge about how they work, may help fuel speculation about market manipulation."It's all confidential,"he said of various producers' hedgebooks."It's just a big black hole."In an afternoon research note, BMO Nesbitt Burns said that gold companies, bullion banks and other counterparties have followed the same practices as Barrick and JP Morgan. BMO Nesbitt said it expects the Blanchard lawsuit to amount to nothing in the end.
In September, consultant Martin Murenbeeld, president of M. Murenbeeld&Associates Inc. in Victoria, B.C., wrote an article defending Barrick's hedge program. He concluded that Barrick's intent is to manage price risk, and the program benefits were self-evident, as it insulated Barrick"more than adequately"against the risk of a sharp gold price decline.
The accelerated selling of gold by hedgers may lower the spot price of gold"somewhat,"Mr. Murenbeeld stated. But there is more to the issue, he noted, including central banks selling gold, and actual production levels from gold companies.
-Lynne Olver, Dow Jones Newswires; 416-306-2028
lynne.olver@dowjones.com
(END) Dow Jones Newswires
12-18-02 1822ET
Sometimes short squeezes don't happen all at once, but it is happening.