Volatility Continues

The market sure is doing some crazy things lately. The Dow was up over 12% or so on election Tuesday. Then, after the candidate who was favored to win actually won, it fell 5% or so for the next two days in a row. I’m starting to miss the good old days when the market just moved in steps of .5% a day instead of big five and ten percent moves. Gratefully, my Barrick stock only lost a couple of percent yesterday, which was much better than the broader market. Today it did not hold up so well, losing 7.3% compared to the Dow’s 4.8%. I was expecting that the announcement of Barrick’s earnings would stabilize their stock performance, but it doesn’t seem to have had any effect. Instead, I just read some analyst writing that the lower gold price impacted Barrick’s earnings, but that’s not quite accurate. 

If you dissect Barrick’s Q3 earnings, you’ll see that their income for the third quarter was, in their words: 

In third quarter 2008, net income was $254 million, compared to $345 million in the same prior year period.  Net income includes impairment charges on investments totaling $97 million, principally due to a write-down of our investment in Highland Gold whose share price declined from $3.49 on June 30, 2008, to $1.21 on September 30, 2008, and was recently trading at around $0.76.  Excluding special items, net income was slightly higher than the prior year period, as higher gold prices were partly offset by higher gold and copper total cash costs.  Although gold production was higher than the prior year period, gold sales volumes were lower due to a temporary increase in unsold finished goods inventory at Goldstrike and Bulyanhulu due to the timing of shipments.  We expect to sell this production in fourth quarter 2008, generating an expected profit contribution of approximately $27 million. 

So it wasn’t the price of gold that impacted Barrick’s earnings as much as the dramatic drop in the price of the common stock in gold companies- specifically they lost their shirt’s in their investment in Highland Gold. But that does seem a one-off event that isn’t likely to be impacting their earnings going forward.

And what of the price of gold. Well, mining analyst and geologist Éric Lemieux has this to say about the price of gold:

The decline in gold prices flies in the face of every theory. The U.S. dollar has been appreciating and the U.S. economy is going through a recession. Gold should be increasing in value in the face of all this uncertainty. To see the price of gold going down right now is almost unexplainable in my opinion. It begs the question, is this due to some type of manipulation, either directly or indirectly?

… I believe we’re experiencing the results of probable financial industry fraud. Time will tell who was responsible. I hope we will hold the perpetrators accountable. Unfortunately, I think certain elements are trying to sweep all this under the rug.

I agree with him that the decline in the price of gold flies in the face of everything that SHOULD be happening at this time of uncertainty regarding gold prices. I also agree that there is manipulation going on and that that will probably be revealed in time. And, as previously mentioned on this site, there is an ever growing disconnect between the price of physical gold and the COMEX price of gold futures for immediate delivery (i.e. “the spot price”). Theoretically, these prices should be within $50 of each other or so because the gold coin would sell at a premium over the spot gold price reflecting the cost of minting the coin itself. Today, the COMEX price for gold for gold closed at roughly $725, while gold listings on ebay in the last week are selling for $940.

That’s a difference of over $200 between those two prices, and that’s indicates that something is just not right. Somehow, the COMEX price for gold does not reflect what people are actually paying for it. Whether that’s due to market inefficiency or outright manipulation by the banking system and their paper claims to gold is left to the reader’s discretion, but I do feel that we’re going to see a strong upward move in the price of gold in the months ahead. Let’s also not forget that the President Bush and President Elect Obama are going to be attending a multinational meeting on November 15th; this promises to be the first of many meetings regarding the current economic crisis and gold has already been mentioned by French President Sarkozy as the answer that will bring “discipline” to the market. So factor in a lot of world leaders paying lip service to gold in a couple of weeks and I don’t see how the price is going to continue to gold down, manipulation or no.

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