By William Patalon III
Money Morning/The Money Map Report
With gold trading at nearly $1,000 an ounce, yellow-metal prices have risen a long way and for a long time.
And yet there still looks to be plenty of room to run.
At least, that's what we can take away from the most recent strategy revealed by the leaders of Barrick Gold Corp. (ABX).
Barrick, the world's largest gold producer, won't hedge its production – even with the big run-up in prices, Chief Executive Officersaid last week during an interview on CNBC-TV.
"The fundamentals are in place for a good sustained rally in gold prices," Wilkins said during the interview.
He added that there's still a lot of room for gold prices to run, Reuters reported.
This is one of those rare company announcements that that's worth looking at closely, since it actually has some significance for investors.
The price of gold – like the price of most commodities – can be incredibly volatile. So gold producers such as Barrick will often take steps to "hedge" – moves that will allow them to lock in a minimum price for the gold that they sell, or even to guarantee minimum sales and profit figures.
To do that, a company such as Barrick will sell its output forward, buy options or invest in other financial hedges to lock in a minimum price for its gold. By locking in the price, the company can be reasonably certain of the sales and profit figures it will report, something the certainty-seeking analysts on Wall Street are usually thrilled to see.
Assume, for instance, that gold prices are on the rise, but that Barrick's executives expect that a price-eroding glut will occur later in the year. One alternative is to purchase hedges that would rise in value if the price of gold falls.
But because it creates an extra expense, companies only hedge during uncertain periods. Barrick would have to pay a fee, known as a "premium," for the options, futures or other financial instruments it uses to hedge. Those premiums add to the company's costs, thus eating into potential profits. But during an uncertain stretch, company executives are typically only too glad to make those outlays in return for having predictable sales and profits during an unpredictable market.
But if the price increase is expected to continue, Barrick executives would have no wish to limit the company's profits – and would suspend its hedging strategy.
Gold has gained about 20% this year and funds managers, speculators and investors continue to pour cash into precious metals, expecting that a weak dollar, rising inflation, additional U.S. interest-rate cuts and record energy prices will continue to push gold and other commodities to even higher levels.
When Barrick's Wilkins made his comments late last week, gold was hovering around the $990 an ounce level. Silver was trading at $21 and platinum was at $2,225 an ounce.
With platinum prices so high, it's possible automakers could switch to the lower-priced gold for inclusion as a key element in automobile catalytic converters – providing yet another catalyst for higher gold prices, Wilkins told CNBC.
For investors seeking to profit from the ongoing escalation in gold prices that Barrick executives expect, here are two potential investments:
- First, the StreetTracks Gold ETF (GLD) offers bullion-based pricing without the storage problems and liability of delivery.
- And, second, shares of the Toronto-based Barrick Gold (ABX) itself. Barrick shares performed about in line with gold itself during 2007. As the world's biggest gold producer, it's an excellent proxy for the sector.
News and Related Story Links:
Barrick Gold Sees Gold Rally Continuing.
- Money Morning Economic Outlook Series:
Outlook 2008: Gold Investments Will Continue to Glitter in the New Year.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.