Producer gold hedging (selling your gold forward) has seemingly been out of favour for some years now with the major producers who did hedge forward spending vast sums to buy back their hedgebooks from the banks.
The last really big hedge buyback was by AngloGold Ashanti which took the decision to finally unwind its hedge position at a total cost of $2.63 billion – this followed decisions to unwind their big hedges by other gold majors like Barrick and Kinross. Others had operated a no-hedging policy and had been seen to be reaping the rewards of the rapidly rising gold price as a result.
As noted at the time of AngloGold’s completion of it unwinding of its hedgebook this, to an extent, removed an area of support for the gold price with hedge buybacks effectively removing a source of supply from the market.
Now, according to the latest Thomson Reuters GFMS gold hedging report, during the third quarter gold producers sold (a small) part of their gold production forward again on a net basis – the first time they had done so for about a year. This meant that the global hedge book gained slightly by 0.6 to 152 tonnes over the reporting period.
While actually too small an amount to indicate a significant trend yet amongst global gold miners the year end hedging position when it is finally assessed may be of particular interest to gold analysts who will be waiting to see if the dehedging tide has at last turned.
Indeed, GFMS still expects gold producers will have de-hedged 20 tonnes of gold on balance although this assumes, according to Commerzbank analysts, that the gold miners will have de-hedged a further 12 tonnes in Q4, which, under the current gold pricing circumstances, and the ongoing propensity of banks trying to protect capital investments by tying loans to guaranteed forward sales, may be an assumption which is open to question.
But GFMS almost certainly does have greater access to ongoing producer thinking than the rest of us – even so
Given the gold price has effectively been flat to lower for the past 16 months, pressure to hedge new production forwards will certainly be increasing. While the majors may have the financial strength to avoid this, mid tiers and any juniors entering production might not and may have to bow to pressures from potential lenders to enter new hedge contracts.
To some extent the position is muddied by the rise of royalty and streaming companies which are another potential source of finance in return for tying up forward gold production (and thus reducing forward revenues for the producer), but given such dehedging as there is at the moment is not from a conscious decision to buy back hedge positions, but the slow unwinding of existing hedges as they run their course.
Thus, with the existing hedges unwinding and with the huge difficulties facing the smaller gold producer, or developer, to raise capital in the current market coupled with a flat gold price, these all combine to make hedging more and more attractive to lender and borrower alike. Under these circumstance will we see the global hedgebook turning upwards again this year? It certainly seems that the odds of it so doing are increasing strongly.