Barrick Gold Signals Gold's Bullish Run Far From Over (Reposted from July)

This is considered heresy by most fans of investing in gold, but we consider the folks at Barrick Gold Corp. (ABX) to be fairly smart cookies. In 1987 they began to hedge their production, agreeing in advance to sell gold at then-prevailing prices. Over the next 14 years as the gold price steadily fell, the forward sales strategy increased their revenues by $2 billion over what would have been achieved at spot prices.

In June, 2001 the company announced plans to buy Homestake Mining, gaining 2.2 million ounces of annual production and 20 million ounces of reserves when gold prices were near their trough. Then, on Valentine’s Day in 2002 they renewed their affair with the metal, announcing that they would reduce their hedging activity to 50 percent of the newly-expanded production. At the time, Gold was trading just north of $300 per ounce.

By November 2003 the company had sworn off hedging, pledging not to hedge another ounce for 10 years. Since then, the existing forward sales contracts have largely been fulfilled. Gold bugs believe Barrick was wrong to hedge in the first place, and are unwilling to forgive what they see as a late recognition of the changing environment.

We see things a bit differently: A 14-year success story of hedging at the right time, followed by a two-to-five year transition away from the program that began more or less at the right time. The chart below shows that Barrick outperformed the AMEX Gold Bugs Index (HUI) while the hedge was on, but has trailed since while the hedges unwound.

Which is a prelude for our commentary on yesterday’s announcement that Barrick will buy NovaGold Resources (NG) to consolidate its interest in projects in Alaska and British Columbia. We think it is a signal that the rise in gold prices is far from over.

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