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Rising Rates "Will Spur" Gold Miner Hedging

Gold miner majors reluctant to hedge in 2014, but picture will change say analysts...
GOLD MINER hedging remains absent despite the drop in prices, says a new report from leading market analysts.
But rising interest rates could see the return of forward selling by gold miners, they warn, just as their longer-term outlook also foresees "further downward pressure" on prices.
"Despite the downward trend in the gold price," say William Tankard, research director, and Janette Tourney, analyst at Thomson Reuters GFMS, "we have seen no evidence so far of a return to largescale hedging activity."
Instead of hedging – and selling gold now for future delivery, locking in current prices to smooth income and avoid further price drops ahead – the gold miner industry has opted to cut both new investment and operating costs, they write in the London Bullion Market Association's quarterly Alchemist magazine.
Gold miners have now seen the spot price of bullion drop 36% from September 2011's record highs.
Since then, notes gold mining expert Lawrence Williams at MineWeb, what little new hedging there is has been "imposed by lenders or motivated by tactical cash flow concerns," with individual projects financed by selling their future production now to raise operating money.
Other small-scale producers have been forced to put "higher cost operations on care and maintenance," effectively shutting their output, say Tankard and Tourney.
Thomson Reuters GFMS head of metals research and forecasting, Rhona O'Connell, recently put the average "all in" gold mining cost at $1200 per ounce worldwide.
Larger gold mine operators have walked away from buying smaller companies in 2013, the GFMS pair explain. But for now, hedging remains unlikely amongst major producers thanks to strong disapproval by shareholders.
Gold miner hedging peaked in 2001, reaching the equivalent of more than 1 year's entire global output at 3,200 tonnes.
But gold then turned higher, costing several major producers badly as the industry bought back those sales at rising prices, adding more than 300 tonnes to annual demand over the next decade and so adding to the bull market's momentum
"It is our impression," says a 2014 outlook from investment bank Societe Generale's Cross Asset Research team, noting the impact on interest rates and gold of US Fed tapering, and forecasting a drop to $1050 per ounce, "that gold producers are increasingly looking to put on hedges which would put gold prices under additional downward pressure."
But on the contrary, says the GFMS miner analysis. "The message seems most clear from the gold majors. Current management will avoid hedging primary production.
"Nevertheless," they go on, "as the macro [economic] cycle continues to evolve and interest rates pick up, some of the factors that make hedging more defensible return."
In particular, the so-called "contango" above current prices offered by forward selling is likely to widen as interest rates rise, inviting more gold miner hedging. Because forward prices include the cost of lost interest on cash, missed by the buyer between now and the future date of delivery.
At that stage, GFMS believes, "there is a decent prospect that producers will begin to grow the collective hedge book once again."

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