Barrick Gold is the biggest large cap miner with a market cap of over $40 billion. The stock is up 15% year to date while
are up 27%. As the
struggles against other currencies and the
prints more money to jumpstart the economy, investors flee to gold as a
, creating an inverse relationship with the dollar. The result is that gold now trades as its own asset class, not just as safe haven insurance for
, but as a risk asset designed for an everyday investor to diversify, trade and make money.
Now see how Barrick Gold says it is capitalizing on gold's rise over the past 10 years.>>
As global economies print more money and lower interest rates to survive financial crises, gold becomes a safer more popular asset to own.
leads to an inverse relationship between gold prices and the U.S. dollar. As gold prices hit a record high of $1,226 an ounce the paper currency started to move towards its all time low of $71.40. As the dollar loses value, commodities become cheaper to buy.
If you invested more in gold over the last 12 months versus the
you would have been a big winner in 2009. Although risk appetite returned in 2009 and boosted global equities, gold saw even bigger gains.
Over the last 10 years, investors have been diversifying into gold more than any other asset class. You don't have to be a doom and gloom analysts or hide gold bars under your bed in order to own the precious metal. But average institutional investors and world
have been increasing their gold holdings supporting high gold prices.
While more investors buy gold, global gold production has been in steady decline since 2001. It takes years for new projects to come on line and they are subject to many environmental and financial variables. Barrick Gold estimates that production will keep sipping unable to keep up with demand.
Central banks are one of the biggest buyers of gold. Countries increase their gold reserves on a percentage basis usually irrespective of the spot price. Portugal holds 90% of its reserves in gold, while the U.S. has 70%. China and India have been strong net buyers during 2009.
In 2009, gold saw a trend reversal from net sales to net purchases. Central banks in particular have transitioned from being net sellers to net buyers. The latest was the
Reserve Bank of India
purchase of 200 tons of gold from the IMF.
As gold prices rise, mining companies furiously try to eliminate their gold hedges to gain full exposure to the spot price. In the GFMS' December Global
Book Analysis for Q3, de-hedging accelerated with 3.18 million ounces removed. Barrick Gold was the big leader, eliminating its hedge book by raising $4 billion in equity. Barrick still has $700 million of obligation associated with its remaining floating contracts.
Hedging is a dangerous game for gold producers and for shareholders. It allows a production company to sell gold at a set price, which guarantees a certain profit and earnings power, but when gold soars, as it as in the last 5 years, profitability is clipped. Now that Barrick is de-hedged its margin is $515 with gold trading at $971 an ounce.
Although Barrick reported a net loss of $5.4 billion in the third quarter (primarily due to its hedge elimination), operating cash flow was up 67% to $911 million. Gold production was 1.90 million ounces at a total cash cost of $456 per ounce which was in line. Barrick continues to develop its low costs mines to boost its reserves.
Gold isn't always the most profitable metal.
and copper are good resources for miners to be exposed to.
is very volatile but has become more popular. Silver has rallied over 50% year to date while copper is has risen over 120%.
There's only so much precious metal in the ground and finding new reserves and jump starting a mine into production is always a challenge.
A big bet for Barrick Gold is its new Cortez-Hills mine. However, production could be halted due to environmental concerns. According to Barrick's website "the company is currently evaluating the decision and considering its legal options."
Barrick partners with smaller miners to get exposure to new resources and increase its reserves. Barrick is currently partnering with
, market cap of $1 billion, in Donlin Creek.
Written by Alix Steel in New York