India, American Barrick, Anglogold Ashanti: Gold Is Going Much, Much Higher

As the saying goes, "follow the money."  Three major players in the global gold market have engaged in highly scrutinized and very visible bullion transactions, sending the loud and clear message to the market that the price of gold is going to go significantly higher in price.  A more subtle message, and more significant, is the signal to the world that the supply of gold available to purchase in large quantities is quickly dwindling.

India is the world's largest consumer of gold (China will soon surpass), American Barrick (ABX) is the largest gold mining company in the world, Anglogold Ashanti (AU) is the world's 3rd largest gold mining company.  They are all buying as much gold as they can - India because that's what India does;  ABX and AU because, otherwise, those two companies will go bankrupt from their massive gold hedges.

As most of you know by now, India's Central Bank announced yesterday that it bought 200 of the 403 tons of gold that the IMF is selling.  They paid $1045/ounce.  An IMF official said the transaction would be paid for by India in hard currency, not IMF Special Drawing Rights, which means India is most likely using U.S. dollar reserves to pay for the purchase.  This is a massive move out of dollars for India ($6.7 billion U.S. dollars).  India would not be engaging in this high profile transaction if it thought that it could easily purchase an eqivalent amount at an equivalent price quietly and privately. India is, to be sure, quite cognizant of the fact that this purchase sends a bullish signal to the market.  One can only conclude that this move signals to the world that the physical supply of gold in large quantities is getting tight, a view that has been presented on this blog and by other informed sources.

American Barrick announced yesterday that it bought back 1 million ounces of gold in October, that it might complete its hedge buyback program before the 12 month window it set in September and that global mine production will continue to decline.  After the 1 million ounces purchased in October, ABX estimates that the value of the remaining hedge that needs to be closed-out is $2.1 billion. The calculation assumes $1050/ounce gold.  Ever since ABX announced its plan to close out its hedge book, the Company has aggressively worked on buying back gold to cover its hedges as the price of gold moves higher. Since September, ABX has issued $4 billion in stock and $1.25 billion in debt for this purpose. It is patently clear to anyone analyzing ABX's activity that managment is becoming increasingly concerned with the manageability of their gold short and the risk of facing the liability of much higher prices in the near future.

Anglogold Ashanti announced yesterday (11/2) that it may accelerate the closing of its hedgebook.  The Company announced that the hedge was down to 4.3 million ounces.  The original timetable for closing the hedge was 2014, a date the Company set just recently in July.  Since that time, the price of gold has gone up around $160/oz.   This means that AU has dropped another $688 million (roughly) on its gold hedge.  To put the size AU's hedge in perspective, 4.3 million ounces translates into about 122 tons.  More than half the amount India purchased from the IMF.  Unless the IMF agrees to sell AU some of the remaining 203 tons that it is selling, AU has a big problem.  It should be clear to everyone that AU faces a huge challenge to buy back its gold hedge without significantly driving up the price of gold and incurring huge financial damage. 

As signalled by India, ABX, AU and some big funds in the U.S., the long-anticipated scramble by Central Banks and large investors to accumulate gold is now underway.  When I first began researching the gold market back in late 2001, I examined some ideas offered by Jim Dines in his subscription newsletter (The Dines Letter).  One of the themes was that Central Banks globally would shift from being net sellers of gold to being net buyers and that the race to buy gold by these enitities would get quite competitive, as the available supply persistently declined and the price inexorably rose.  Please keep in mind that these same Central Banks had been key suppliers to the market over the past 10+ years.  To back up this thesis with an example, the European Central Bank System had been selling 500 tons per year since 1999, up until last year.  This year, as the price of gold has continued its ascent, the ECB selling has slowed to a trickle and a few of the member banks (Germany, for one) have announced that they are done selling gold. Some ECB banks have actually purchased gold recently.

I suggested last week that it wouldn't be a good idea to wait much past Halloween if you were thinking about buying gold.  The actions announced by China, Barrick and Anglogold have added considerable urgency to that suggestion.  Gold is going to go MUCH higher in price.  Period.