hedging hits record lows - but not in oz!

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    Hedging hits record low – Virtual Metals

    By: Stewart Bailey

    Posted: 2003/01/20 Mon 20:25 | © Mineweb 1997-2003

    JOHANNESBURG – The world’s top 98 gold producers cut their collective hedge positions in the third quarter of last year by 4.8 million ounces, in response to a rising gold price and an increased appetite for pure gold exposure. A hedging survey released today (Monday) by London-based Virtual Metals Research and Toronto-based Haliburton Mineral Services, said it was likely that the de-hedging trend, which has been credited with much of forward momentum in the gold market, would continue.
    “Unlike the trend of the 1990s, the producers through much of 2002 elected not to add materially to their hedges as the international price has appreciated and it remains to be seen if this philosophy continued during the fourth quarter,” said Jessica Cross, managing director of Virtual Metals, who added that the December quarter figures would be crucial for the gold market as they would show producer hedging behaviour when faced with a rising gold price and strengthening South African rand.

    The authors of the report also calculated a Gold Hedging Indicator (GHI), which it described as “the single number which gives the closest measure of the actual influence of total hedging on the market”. (click here to for full explanation on Gold Hedging Indicator calculation) The GHI for the September quarter came in at 86.6, the lowest point since it was introduced in June 2001.

    According to the hedging survey, the International Gold Hedge Book, which tracks the hedging activities of 98 gold companies, accounting for 65 percent of total world gold production, registered a 4.8 million ounce decrease during the third quarter of last year. The report now places the total global hedge position at 86.6 million ounces.

    Cross said the continued decrease in the size of the International Hedge Book was related to both the consolidation in the mining industry and the rise in the gold price over the past two years. The current bull market in gold had essentially reversed the huge hedging drive spurred by a declining dollar gold price, which characterised the gold market in the 1980s and 1990s. “Further reductions in exposure to price protection should not come as a surprise,” said Cross.

    Hedge still being pruned
    For the meantime, though, the reducing hedge book continues to add grist to the mill for gold bulls. The total industry hedge position has fallen consistently in almost all the major producing regions over the past year as gold producers have either wound up their existing hedges or declined to take out new positions. Virtual Metals says the 12 months to September saw a decline of 15 million ounces, or 15 percent.

    The net delta of North American producers was 6.5 percent lower for the quarter, falling 3.3 million ounces to a total of 43 million ounces. African producers’ de-hedging efforts slowed from the breakneck speed of the previous quarters, dropping by 3.6 percent (800,000 ounces) to 21 million ounces. “This quarterly figure actually masks the fact that the African hedge book has shown a marked contraction over a full 12 month period, down from 27.3 million ounces at the end of September 2001,” said Virtual Metals.

    African gold producers were the top contributors to the decrease in hedging on an annual basis, with only 1.4 years of the country’s production hedged compared to a hedged commitment of 1.8 years in September 2001. Australian producers, however, kept their hedged production constant at 2.8 years of the country’s output. “Hedging associated with the Australian producers remained remarkably stable throughout the September 2002 quarter, down a mere 0.7 million ounces to 22.6 million ounces and this stability has characterised the regional book for the past six quarters,” said the report.

    The report said the 98 gold producers surveyed had 1.9 years of their collective gold production committed to price protection programmes of one sort or another – this was down from an average of 2.2 years at the same time last year.

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