Posted Dec 6, 2013 by Martin Armstrong
John Thornton, ex- Goldman Sachs banker who next year takes over the helm at Barrick Gold, the world’s top gold miner, has suggested that hedging may once again be appropriate. We use to assist mines in hedging. Outsourcing hedging is not really done other than to hand the reins of power to a bank who collects fees.
At Princeton Economic International, we use to take on the outsourcing projects to assist companies in restructuring portfolios globally to create natural hedging strategies and to outright hedge currency and product risk on a PERFORMANCE basis rather than just fees where the house always wins.
The mining companies were sold a bill of goods by the banks that they should always be hedging their product to lock in profits when gold was about $300 and in decline for 19 years. They lost tremendous upside in the 13 year rally. Naturally, like most unprofessional traders, they lifted their hedges to share in the new bull market. Then the high came in place and gold has crashed and burned since 2011.
The majority of the mines will once again hedge going into the low. They will have their short positions in place and end up with losses during the next rally as they did before.
You would be surprised, but the majority of big corporations do not have professional treasury management facilities. Most will defer to the banks for advice, which is how they make a lot of money trading against their clients.
Corporations are the targets of the banks more often than not. Even central banks are now starting to outsource the management of their reserves. Financial risks have always existed wherever trade and international investment have been undertaken. However, the extent to which they have been identified, quantified and controlled has varied tremendously. Some well-publicized losses incurred by both financial and non-financial organizations around the world in recent years. We were call into a major auto manufacturer who had made a hedging decision at board level based upon the headlines in newspapers.
Treasury risk management has become increasingly important. Companies need to comprehend the market trends to ensure that their own operations will survive. A Japanese airline bought a fleet of 747 planes in dollars years ago, but failed to hedge the currency. They were forced to lay-off almost 25% of their work force. Both currency and product are presenting tremendous risks that boards are incapable of comprehending. Simple and properly controlled risk is essential to good management.
Investors have to understand that hedging is vital to safeguard a company and its assets. However, also understanding that the hedging is done on a professional manner rather than listening to brokers and banks interested only in fees, should be distinguished from professional management.
Treasury Management has become the greatest un-quantified risk in a business given the implications of currency and product trends. Many companies should be reconsidering the way they have viewed treasury management in the past and making sure that in future treasury management contributes positively to the overall success of the company in a controlled and structured way. Investors need to pay attention to these trends and how companies are handling those risks.