By Bob Chapman - October 4
We hear many stories and suppositions and this is one of the latest regarding Barrick Gold. Supposedly they have hedged part of their production through a spot deferred forward sale contract. Barrick makes a forward contract with a bank to deliver gold at a certain price at a certain date. But what makes these contracts different and also dangerous for counter-parties is that Barrick has the right to defer the delivery of gold for periods ranging from five to ten years. More recently, they may have entered into contracts that allow them to defer delivery for 15 years. Rather than give you the details, these kinds of contracts would be beneficial for Barrick and if Barrick decides to defer the sale there would be trouble. One bank, probably JP Morgan Chase, has $41 billion in gold derivatives, a portion of which is with Barrick. If gold goes up and Barrick defers, which we are sure they would, Morgan would have to find $5 billion in gold. If Morgan buys in the market it would force prices considerably higher, either that or the US government, which we believe is guaranteeing Morgan’s action, would deliver the gold, which we doubt because they may not have it or they may not want to face the public’s wrath for selling it or Morgan reneges and goes into liquidation. If Morgan goes down the entire derivative structure goes with it. It could be that the Congress could take Morgan into receivership and allow the American taxpayer to pay the debt, but that would cause a number of Senators and Representatives to lose their jobs. Whatever the outcome in a situation like this we believe all derivative positions would be cancelled or zeroed out. That means all hedgers would no longer be hedged and they world have to return to a receiver part of the funds they received, which would put them all in a precarious financial position. The ensuing financial chaos would send gold prices considerably higher. It could be that in cutting such a sharp deal for itself that Barrick may have laid the groundwork for the destruction of the derivative market and the financial system. It won’t now take much to create a crisis. Full Story
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