Gold outlook improves as miners trim hedges
By JOHN PHACEAS
21aug00
AUSTRALIAN gold producers have done their bit to reduce downward pressure on the gold price during the June quarter, unwinding hedging positions for the second quarter in a row.
Australian producer hedging, or selling future gold production into fixed-price contracts, has been widely blamed for weak investor sentiment.
Critics argue the practice demonstrates a lack of faith by producers in the outlook for their own product.
Australian miners, who produce more than 10 per cent of world gold output, have traditionally been the most hedged, with more than 50 per cent of mine reserves covered by forward sales contracts.
But according to research by Ord Minnett, local gold miners cut overall hedging levels to 42.1 million ounces to the end of June, almost 2 million ounces less than reported levels just six months previously.
Though hedging in the June quarter fell just 157,000 ounces overall, 12 of Australia's biggest producers, including Normandy, WMC and Sons of Gwalia, wound back hedge cover by 1.14 million ounces.
Normandy was particularly brutal, winding back almost 550,000 ounces, while WMC wound back 177,000 ounces and Sons of Gwalia wound back almost 30,000 ounces, reducing its overall cover by 365,000 ounces from the previous year.
However, nine other producers took out contracts on an extra 980,000 ounces, reflecting the attraction of forward selling at a time of a weak Australian dollar and low gold leasing rates. Goldfields was responsible for 340,000 ounces of the extra coverage, followed by Delta, which took out contracts on an additional 205,000 ounces, and New Hampton Goldfields with 167,000 ounces.
Nonetheless, Ord Minnett said Australian hedging should fall "substantially" over the next few quarters.
"We would expect hedging to drop well below the 42 million ounce level by September 30, and a reduction of over 1 million ounces would not surprise," Ord Minnett said.
However, the actual fall would hinge on exchange rates, as any further weakening of the Australian dollar would increase the Australian dollar gold price, making forward selling more attractive to local producers.
Australian Gold Council executive Greg Barns said the research should defuse much of the criticism aimed at Australian miners.
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