Investors applaud gold hedge cutting
Gold miners are getting a pat on the back from investors for a nice piece of housekeeping – trimming their hedges, analysts said.
‘Hedge cutting’ has been hailed as good husbandry and has helped sparked the gold price close to its highest level in more than two years and led to a surge in gold equity stocks.
Hedging is when producers sell their as-yet unmined nuggets in forward markets at fixed prices in order to guarantee income.
A laudable policy during the gold bear market of the last few years, hedging has proved a dead loss since gold prices have cleanly broken through the key $300 a troy ounce level on jitters over the Middle East and the safety of Japan’s financial system.
With bullion in the ascendant, leading gold miners such as South Africa’s AngloGold have called time on their hedge books containing fixed prices for future output.
Now it is time to take advantage of expected higher prices.
The move by producers to trim their hedges in anticipation of higher prices has been so deft that it has in itself helped the stronger prices, with analysts saying the decision has removed a cap on price levels.
“Reduced hedge selling has been one of the key contributory factors in driving the gold price,” said Peter Hillyard, senior manager at the London arm of ANZ Investment Bank.
Top industry consultants Gold Fields Mineral Services (GFMS) see hedge reductions as instrumental in fanning the markets higher and expect a further significant fall in hedge books in coming months.
Hedging fell for a second consecutive year in 2001, generating a significant 147 tons of physical demand, with the fall mainly in the fourth quarter of last year, GFMS said in their annual survey of the industry.
AngloGold, smarting from defeat by rival Newmont in a takeover bid for Australian miner Normandy, has vowed to ‘aggressively’ reduce its hedge book to win over investors and boost its share price.
For Newmont, the world’s biggest gold firm, hedging is almost a dirty word and the firm has vowed it will not sell a single ounce under hedging.
Other producers such as Placer Dome and Barrick Gold have also announced they will sell only a part of their output in forward markets.
Hedging contracts are not normally public knowledge.
But mining firms caught in hedges where they receive less money than they would have got from higher spot prices, such as South Africa’s Durban Deep, have been panned by investors.
Previous lessons are being learnt, most notably the near collapse of African gold miner Ashanti during the last spike in the bullion price in 1999.
Ashanti teetered due to heavy hedging losses when a sharp rise in gold prices left it holding huge losses on short positions in the forward market for gold.
Ashanti this month said it had agreed interim deals on margin-free hedge trading with all of its active counterparties as it restructures its debts.
– Reuters |
