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Finance ministers from the G20 countries met in London to discuss the outline of a new framework for regulating finance ahead of a summit in Pittsburgh this month. The new rules, should they be adopted, would require banks to increase capital as a buffer against a downturn and ask financial companies to develop “living wills” that set out procedures for creditors to unwind a failed bank. The meeting was held almost a year after the collapse of Lehman Brothers, which helped trigger the world’s worst financial crisis since the 1930s. See article The ministers also discussed ways to implement uniform guidelines on bankers’ bonuses. Separately, Lloyd Blankfein, the boss of Goldman Sachs, gave a speech in which he said anger about bankers’ pay was “understandable and appropriate”. A 477-page report by the inspector-general of America’s Securities and Exchange Commission concluded there were systemic breakdowns in the agency’s oversight of Bernard Madoff. Mr Madoff was sentenced to 150 years in prison for his Ponzi scheme. The SEC first investigated Madoff-related funds in 1992.
America’s Kraft Foods launched a takeover bid for Britain’s Cadbury, which rejected the £10.2 billion ($17 billion) offer as too low. The confectioner traces its roots back to 1824 when it was founded by Quakers. As well as chocolate it makes chewing gum, the worldwide market for which grew by almost half between 2004 and 2008. Kraft, which includes Toblerone chocolate among its brands, is to press Cadbury for a deal. See article Suntory, a Japanese drinks and distilling company, was poised to make a bid for Orangina Schweppes, a European beverage-maker which used to be owned by Cadbury. Deutsche Telekom and France Telecom announced a 50:50 joint venture in which they will combine their T-Mobile and Orange mobile-phone units in Britain. Deutsche Telekom will contribute £625m ($1 billion) to equalise the debt burden between the two firms and both brands will be maintained separately for 18 months after the transaction closes. The deal creates Britain’s biggest wireless operator, with a combined 37% of the market for subscribers, vaulting ahead of Telefónica’s O2 and Vodafone. Competition regulators will scrutinise the proposal.
The World Trade Organisation found that preferential government loans received by Airbus breached WTO rules. The decision is preliminary and was not announced. America filed the complaint against Airbus in 2004, after which Europe countersued claiming the American government’s aid to Boeing was illegal. An interim ruling on that case is expected in December. Switzerland has the world’s most competitive economy, according to an annual index from the World Economic Forum. America came in second place for the first time since 2004, when the WEF began compiling the data in their current form. In its ranking of the “soundness” of banks, America fell to 108th position, behind Tanzania. Britain was 126th, one notch below Burundi. America’s unemployment rate rose to 9.7% in August, its highest level since June 1983.
Gold prices traded around the $1,000-a-troy-ounce mark. Investors are turning to the metal (again) as a safer alternative to other assets amid low interest rates and worries about the dollar’s status as a currency reserve. The greenback has fallen to its lowest level in almost a year against a basket of currencies. Sweden’s Koenigsegg, a tiny maker of high-performance cars, said it would sell a minority stake in its business to state-run Beijing Automotive Industry Holdings (BAIC). The deal helps Koenigsegg finance its purchase of Saab, which is being sold by General Motors. Meanwhile Geely, another Chinese carmaker, said it would require the help of a state-backed investment company in its probable bid for Sweden’s Volvo, which is being sold by Ford. Steve Jobs made his first public appearance since undergoing a liver transplant. Apple’s boss took to the stage for a product launch at which he unveiled the latest version of the iTunes online-music service and a new range of iPod devices, including one model with a video camera.
Contrary to rumours, the Apple event did not mention when the catalogue of songs by the Beatles would become available on iTunes. Negotiations have dragged on for months with EMI, which meanwhile issued boxed sets of remastered Beatles albums in an effort to revive its waning fortunes. Viacom released an elaborate new video-game based on the band.
Adrian Douglas: Barrick can't get gold needed to cover hedges
Submitted by cpowell on 11:33AM ET Wednesday, September 9, 2009. Section: Daily Dispatches By Adrian Douglas
Wednesday, September 9, 2009
Today Mineweb published a report by its writer, Dorothy Kosich, covering the announcement by Barrick Gold that it will eliminate most of its hedge book: http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=88850&sn=Detai...
But Barrick is not eliminating hedges by actually delivering gold. The company is instead raising cash to pay off its obligations. This is technically a default on the delivery of the hedged gold.
I recently wrote an article titled "A Run on the Bank of the Gold Cartel" in which I asserted that many factors are coming together to put stress on the physical gold market. See: http://www.gata.org/node/7764
Paul Walker, CEO of the GFMS metals consultancy, said recently that the gold price has risen because there have been "large, lumpy transactions in a market that has a degree of illiquidity." I can't think of a better euphemism for a short squeeze.
A gold hedge is entered into when a gold mining company expects that the future price of gold will be lower than it is today. The company enters into a contract with a third party to sell some of its yet-to-be-mined gold in the ground. For this the company receives the cash value of the gold based on the prevailing spot price. The company then has an obligation to produce the gold and deliver it to the third party at some future date. If the gold price indeed declines, the company reaps a superior profit on its gold sales compared with selling the gold as it is mined at the prevailing spot price. But if the price of gold rises, the mining company has forgone some of its profit by having sold the gold in advance at a lower price.
Barrick has announced that the company is not delivering the gold it has sold forward. The company is raising cash from the sale of stock so it might deliver cash instead of gold. I donât know if this is a default under the terms of the companyâs hedge contracts, but it is technically a default because gold was sold for future delivery and the future delivery is not being made.
MineWeb's story says: "Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its fixed price gold contracts within the next 12 months, as well as $1 billion to eliminate a portion of its floating spot price gold contracts. A $5.6 billion charge to earnings will be recorded in the third quarter as a result of the change in the accounting treatment of the hedges."
Essentially this means that some time in the past Barrick received cash for its yet-to-be-mined gold that the company now is having to pay back, along with considerably more, insofar as the company is recording a loss of $5.6 billion without a single ounce of gold being involved. This is not mining; it is gambling. And Barrick, and more importantly its shareholders, lost big-time.
MineWeb's story says: "The company's current gold hedges include 3 million ounces of fixed-price contracts where Barrick does not participate in gold price movements. The contracts have a negative mark-to-market position of $1.9 billion as of September 7. In addition the company has 6.5 million ounces of floating contracts where Barrick fully participates in gold price movements. The current negative $3.7 billion marked-to-market position of the floating contracts does not change with gold prices. No activity in the gold market is required to settle these floating contracts." [Emphasis added.]
In theory Barrick should have to go into the market and buy gold to deliver into its obligations instead of paying cash. Of course this would blow the gold price sky-high and thus might bankrupt the company in the process. But this is not the end of the story because the counterparty to these hedges, probably JPMorganChase, no doubt also has obligations to deliver to some other entity the gold it was expecting from Barrick -- maybe a central bank. Will the counterparty also be able to settle its obligations in cash or will significant quantities of gold have to be purchased? Barrick may be getting off the hook but this technical default creates a shortage of physical gold.
Many other mining companies, such as AnglogoldAshanti, that had undertaken disastrously unprofitable hedges when gold was selling at multi-decade lows and below its cost of production have been delivering their production into their hedge obligations. Barrickâs action is different -- a technical default on delivering physical gold that had been sold forward.
This is explosive news for the gold market. The run on the Bank of the Gold Cartel is unfolding. Much more gold has been sold than can be delivered. The implications for the gold price are mind boggling.
----- Adrian Douglas is publisher of the Market Force Analysis newsletter (www.MarketForceAnalysis.com) and a member of GATAâs Board of Directors.
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It is now the year since the collapse of Lehman Brothers. Since then governments in America, the euro zone and Britain have provided capital, loans and guarantees to banks equivalent to about one sixth of GDP. Yet many think too little has changed on Wall Street and in the City of London. Lehman aside, no big firms have been allowed to fail, trading books are about the same size and bonuses are back. In our cover leader we argue that the current bonanza is likely to be temporary and that bonuses are the wrong place to start reform. The crucial thing is to wean banks off state support—not just the explicit guarantees but the implicit assumption that the state will step in. Change that, and everything else, including pay and the heads-I-win, tails-you-lose culture, will move too. Here are some other pieces from this week's issue you might also be interested in. You can click straight through to each one and read it online at Economist.com using the links below.
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