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Gold Mining Hedge-Book Falls Again

THE TOTAL worldwide level of Gold Mining hedging activity – by which gold producers seek to lock in current Gold Prices – fell in the first quarter of the year, according to a report from a leading precious metals consultancy.

The global producer hedge book decreased again during the first quarter by 2.3 tonnes, says the latest report from consultants Thomson Reuters GFMS for investment bank Société Générale, leaving the outstanding producer hedge book at 157.7 tonnes – down from a revised figure of 160 tonnes at end-December.

"In addition to our expectations for ongoing volumes of project hedging," said GFMS last week, "our proprietary price forecast foresees a rise in Gold Prices toward the end of the year.

"We expect that for the full-year, the market will see a modest amount of net gold hedging."

Gold Mining firms hedge gold by selling it for future delivery. That locks in the current value, enabling them to sell it for the same price despite any potential drop in the future. Hedging thus reduces losses for a producer where the price is dropping.

Globally, the Gold Mining industry's total hedge book has now declined by 95% from its peak at 2,920 tonnes of gold in 2001. This reduction has come in contrast the sharp increase in the Gold Price.

"There were no major de-hedgers during the first quarter," says GFMS, with a multitude of producers simply running down positions as they mature.

"We expect the impact of hedging/de-hedging in 2012 to continue to be on the periphery, rather than an important price driver or support."

Paul Walker of GFMS believes that if Gold Mining producers were to resume hedging, it would send a clear signal to the market that they considered the price to be at or near a peak. Management had to begin sensible talks with investors "to begin formulating a way to begin locking in value," he says.

Otherwise it could be "a dereliction of duty to your shareholders and the country you're based in."

The Financial Times also noted this week that "medium- and small-size miners listed in London, Toronto, Johannesburg and Sydney could soon feel the pressure from bondholders to lock in prices to secure cash flows – particularly in commodities whose prices are still well above marginal costs, such as copper and iron ore."

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Robin Molinas is working as a research assistant at BullionVault, the No.1 gold and silver ownership service for private investors.

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