Gold hedging beginning to increase again?
In its latest quarterly report on gold hedging, London's VM Group sees a small increase in Q1 2011 bucking the downward trend which has been in place virtually every quarter since February 2002
Posted: Sunday , 29 May 2011
One of the contributors to the low gold prices of the 1970s was substantial hedging of forward output by mining companies, either as corporate policy, or at the insistence of lending institutions who wished to protect their positions should the price fall further. Conversely, a contributor to the rise in gold prices over the past few years has been very substantial de-hedging by, in particular, the gold majors, which has effectively soaked up some gold demand, as belief grew that the run up in the gold price had much further to go. Indeed, most gold mining companies have now reduced their gold hedge positions to zero, or close to it.
But, with the substantial rise in the price of gold over the past 11 years, the ability of gold mining companies to mine profitably at current price levels has prompted a number of observers to suggest there is again merit in forward hedging of some gold output to protect against any future sharp downturns in the metal price.
That this may, indeed , be starting to happen is shown in the latest statistical data from VM Group/Haliburton Mineral Services, on behalf of ABN Amro Bank which publishes a quarterly analysis of the global gold hedgebook. The report notes as follows:
The global hedge book rose quarter-on-quarter in Q1 2011 as new hedges outweighed dehedging for the first time since Q2 2010. The global delta adjusted headline figure rose 0.3 Moz, to 5.1 Moz, while on a committed ounces basis it gained 0.7 Moz, to 6.6 Moz. It was the first rise in the hedge book since Q2 2010, but notably the largest increase to the hedge book, on a committed ounce basis, since Q1 2002. Compared with the same period in 2010, the global hedge book fell a delta-adjusted 2.1 Moz, and 1.6 Moz on a committed basis, due largely to the unwinding of AngloGold Ashanti's hedge book, which was finalised in early Q4 2010.
The quarterly rise in the hedge book in Q1 2011 was partly due to a rise in calls sold in the North American region and to a lesser extent in the Eurasia region. The Eurasia region however saw net forward sales rise, as Sweden's Boliden sold forward more than 0.3 Moz over a period of six years. This accounted for a third of all new hedge positions taken out by miners during the quarter and was singularly the largest component to the rise in the book on delta-adjusted basis.
While one swallow does not a summer make, it is interesting to surmise whether this fairly marginal change in the global gold hedge position (see chart) is, indeed, itself is a sign of things to come and/or if it represents the beginning of doubts in the mining community of the sustainability of the gold price in the short to medium term.
Chart courtesy of VM Group
Given how low the amount of gold hedging is currently in place, a relatively small increase in the hedge position such as this is not that significant, but if it is seen to continue, and increase, in future quarters then it could have an effect on available supplies to the market and, ultimately on the gold price itself.
Food for thought as the report points out!
To download the full report, click on www.virtualmetals.co.uk .