Newmont was a longtime darling of “pure gold” stock investors, having eschewed the hedging and the forward sales that its rival Barrick Gold so often bragged about. However, in 2002 a three-way merger brought Newmont a hedge book and the supposed genius who formulated it.
Whereas prior to the merger Newmont boasted of being a “pure gold” stock play, Newmont reversed course by continuing the acquired hedge book. That turned out to a costly decision. Now, Newmont has seen the error of its ways.
With its shares selling at a 22-month low, Newmont announced it is eliminating its entire 1.85 million-ounce gold hedge position. In June, the company spent $578 million to eliminate its forward sales contracts, and will report a pre-tax loss of $531 million on the early settlement of these contracts, after a $47 million reversal of previously recognized deferred revenue.
Although the company tried to spin the announcement that its “merchant bank” unit was not all that bad, the fact is “the company expects to incur a non-cash impairment charge of approximately $1.7 billion, to be recorded as part of discontinued operations, in the second quarter of 2007,” reports the mineweb.com.
One point seven billion dollars, that’s a major hit for anyone’s pocket book. However, what’s bad news for Newmont shareholders is good news for gold and silver investors.
Although there is the possibility that the hedge book can be sold to another brave speculator will continue it, it is more probable that large quantities of gold, and probably silver, will have to be purchased to settle some of the hedge book deals. Perhaps today’s solid jumps in the price of gold and silver can be attributed to Newmont’s announcement.
The really goods news for gold and silver investors is that one of the world’s largest gold producers will no longer be in the involved in hedging and forward sales of gold and silver. Hedging and forward sales result in artificially increasing the supply of gold, which puts downward pressure on the price of gold. Both activities “bring gold to the market” before it is actually mined. Newmont’s announcement is indeed good news for gold and silver investors.
For further details about Newmont’s decision, read mineweb.com’s article.