Gold Miner Hedging Now a "Dead Cert" in 2014

Q1 total doubled by Russia's No.1 producer, but levels dwarfed by 2001 peak...

 

GOLD MINER hedging is set to increase this year as fear of falling prices spreads, according to leading analysts.

 

The global gold mining industry's hedge-book – effectively the amount of future gold production already sold to defend against possible price falls – will end the year higher than 2013, says a report for French bank Societe Generale (EPA:GLE) from consultancy Thomson Reuters GFMS.

 

Last week Polyus Gold International (LON:POLG), the largest gold miner in Russia, announced an 88-tonne hedge, aimed at locking in prices above $1321 per ounce.

 

Already by end-March, the GFMS report states, the global gold miner hedge-book stood at 87 tonnes, up by almost 10 tonnes from the end of 2013.

 

Gold miner hedging enables producers to lock in current prices and protect their income from future price falls. But it risks costing miners, and shareholders, money if prices rise.

 

Polyus' move is "the most significant gold producer hedging activity since the wave of de-hedging in 2008 and 2009," says William Tankard, manager of precious metals mining at GFMS Research & Forecasts, pointing to when world No.1 gold miner Barrick Gold (NYSE:ABX) closed the last of its large hedge-book, built at much lower prices a decade before.

 

Gold miners in 2014 "should begin to educate and persuade their shareholders" about the benefits of a hedging strategy, according to analysts at US bank Citigroup, so that their income is not "tossed around by the volatility of the gold price."

 

The largest single addition of the first quarter came from Australia-based gold miner OceanaGold (TSE:OGC). But its planned 6-tonne hedge over a period of two years is "dwarfed" by the Polyus action, says Tankard.

 

Net hedging in full-year 2014 is now a "foregone conclusion" he says. Even with no additional hedging from here, the Q1 total plus Polyus' move would leave the global hedge-book at 127 tonnes by year end, net of 48 tonnes of newly mined gold set to be delivered against previous hedges.

 

But 2014 levels remain far below the hedging activity done during the long gold bear-market ending 15 years ago.

 

GFMS's figures indicate that, at current rates, approximately 15.5 days' worth of current global gold mining output will be hedged at year-end. That compares to 400 days' worth of production at the hedge-book peak in 2001.