ALL ABOUT GOLD
BARRICK GOLD (ABX NYSE) MORPHED INTO MEGA BARRICK ON JANUARY 19, 2006!
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BARRICK GOLD (ABX NYSE) MORPHED INTO MEGA BARRICK ON JANUARY 19, 2006! THE QUESTION IS, WHAT DOES THIS MEAN FOR THE INVESTOR?
Barrick Gold became the largest gold mining company in the world (market capitalization) on January 19, 2006, by acquiring 81 percent of Placer Dome stock.
Barrick Gold is a modern corporation, having been founded in 1983. Barrick Gold has always been a financially savvy firm, having been founded after the January 21, 1980, top in gold ($850 USD cash price).
This allowed Barrick Gold to buy gold mines at distressed prices until August 1999, when the gold market finally made bottom at $251.70. Since 1999, Barrick made key acquisitions in the mining world, including the Homestake Mining Company in 2001. The recent purchase of Placer Dome put Barrick at the top of the heap in terms of market capitalization.
Barrick Gold is so savvy financially that it completed the purchase of Placer Dome only two days shy of the 26th anniversary of the all time high of Gold (January 21, 1980). It appears that Barrick Gold’s management is in complete harmony with gold’s cycles.
Creating Mega Barrick at this time may be Barrick Gold’s management’s greatest accomplishment.
Yes, Mega Barrick is now a perfect vehicle for riding out the inevitable down cycle. A management team as intelligent as Barrick Gold’s knows very well that it’s impossible to predict the final top, but they have gotten the good ship Mega Barrick into fighting shape in time to capitalize on the fall in gold prices. The big swing in asset prices only occur once or twice a generation, and Barrick Gold’s management is not going to miss the "big" swing to the downside!
It’s a well-known fact to professional investors that you ride small CAP stocks up the cycle, and you ride big CAPs down the cycle. Because short selling has the disadvantage of paying margin interest, and paying declared dividends, a break-even on the trade is unacceptable. So the short seller must pick stocks that are "stable" within their natural downtrend!
The biggest danger of shorting the small CAP stocks is the constant threat of a group buying to run the shorts out! The small cap stocks also tend to be "mystery" stocks. That means that very little is really known about them. They tend to respond violently to rumors. When a group (cartel) begins a buying campaign accompanied by the appropriate rumors, uninformed buyers join the fiasco. This can ignite a short squeeze (per J. L. Livermore)! Obviously, battle hardened professionals try to avoid shorting the small CAP stocks for these reasons.
There is another reason why Mega Barrick had to "bulk up" in market capitalization. You have to borrow the shares from someone to sell short. That means that there must be a Mega amount of shares outstanding. It is imperative that institutions are up to the gunnels in shares. Tax policy prevents them from selling their shares (long term capital gains and all that). This is the reason that the short seller has to pay a declared dividend to someone. The short seller pays it to the real owner who lent him the shares!
Mega Barrick is superbly positioned to ride both the up and the down waves. This has to be one of the best management teams in the world when it comes to working with the natural cycles of economics.
It’s an interesting fact the J. Paul Getty admitted how he made his fortune. Getty Oil was listed on the NYSE for a good reason. This ensured a big interest in buying and selling the stock. It was also large CAP stock for the shorting advantage that it gave J. Paul Getty. Getty’s basic formula was when his firm sold for ½ of what the oil he owned was worth, he bought a few million shares Conversely, when the company sold for twice what the oil was worth, he sold his shares, and then sold short when the oil market started breaking! This was the basic formula Getty followed on his
We must ask ourselves if Mega Barrick’s management is unaware of J. Paul Getty’s strategy! Looking at Mega Barrick’s history, I suspect that they memorized Getty’s formula.
WHAT ARE THE VITAL SIGNS FOR BARRICK GOLD (ABX NYSE)?
The Chart for Barrick Gold makes it obvious to those with real financial sense that Barrick has a major problem at the $28 to $30 level. There is some serious supply that is waiting to unload on those who are foolish enough to enter the fray at these price levels! Remember that Barrick Gold management has already ensured an escape hatch by creating a very short able stock for themselves.
For those who have eyes, let them see!
It must be stated that there is no indication that gold is in trouble at this time. We don’t know what Barrick Gold’s management team is looking at. It’s very unlikely that they are going to share their strategy with us. There have been some reports that Barrick Gold will be ceasing its hedging activites. This is very interesting if true, because that means that Barrick Gold is uncertain about this cycle, and has opened all options.
They certainly will cease hedging should Gold close above $590, as that would signal a huge bull market. Hedging would just throwing money away under those conditions. The creation of a short able stock leaves them with an escape route should gold turn down unexpectedly.
Perhaps we should assume a mental picture that allows us the same flexibility as Barrick Gold has created for themselves! We must assume that Barrick Gold knows more about the actual state of the gold market than we do!
In case the chart shown above fails to open, you can find this chart at http://charts.barchart.com/chart.asp?sym=ABX&data=G&date=022606&den=HIGH&divd=Y&evnt=ADV&grid=Y&jav=ADV&size=B&sky=N&sly=N&vol=Y&late=Y&ch1=011&arga=&argb=&argc=&ov1=&argd=&arge=&argf=&ch2=&argg=&argh=&argi=&ov2=&argj=&argk=&argl=&code=XSTKIC&org=stk
Wayne N. Krautkramer Onlypill@cox.net