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After the Gold Rush?

By Motley Fool Staff
November 24, 2003
Gold has been on a tear in recent years, flirting recently with $400 an ounce, a level not seen since 1996. (In 1999, gold prices hit 20-year lows.)

Contributing to a jump this past week was news that Barrick Gold (NYSE: ABX) will no longer engage in hedging. Canada's Barrick is North America's second-largest gold producer, after Newmont Mining (NYSE: NEM), which is numero uno in the world. In the past, Barrick would "hedge" its exposure to changes in the price of gold by selling gold that has yet to be yanked out of a mine today at a predetermined price. Other firms have also cut back on hedging, which has forced purchasers to buy on the "spot market," at current prices.

There's some sense to Barrick's reasoning. In the words of founder and CEO, Peter Munk, since the firm now has plenty of cash (more than $1 billion, to be precise), "Hedging to us is no longer a requirement for running our business as it no longer creates shareholder value. Hedging was a means to overcome cyclicality. Over the next decade, we will do no more hedging."

The company's current hedge book contains orders totaling about 16 million ounces, equal to roughly three years of output.

If you find yourself tempted by the idea of investing in gold, think it through. (Though of course, investing in a gold-producing company is not exactly the same as buying the shiny yellow bricks.) Gold has done well for investors over specific periods, but overall, its record is far from impressive.

From Jeremy Siegel's seminal book, Stocks For the Long Run, here's how a single dollar invested in various vehicles would have fared from 1802 to 2001 (yes, just about 200 years!): stocks, $600,000; bonds, $1,000; bills, $300; gold, $0.98. (These numbers are adjusted for inflation.) Gold's results are not too pretty.
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