Global gold hedge heads below 10moz

Allan Seccombe | Tue, 17 Nov 2009 13:34

[miningmx.com] -- THE global gold hedge book could fall below 10 million ounces by the end of this year, but demand for exchange-traded funds is showing signs of dwindling, the BNP Paribas Fortis Hedging and Financial Gold report for the third quarter shows.

Gold producers have shaved around 90 million ounces from their forward sales positions or hedge books since 2001 to take advantage of higher gold prices and because their shareholders largely found the instrument unpalatable.

In the third quarter of this year, Barrick made the largest reduction of those companies cutting their hedge books, with 2.5 million oz closed out. This together with AngloGold Ashanti’s 500,000 oz, the global hedge book shrank 3.3 million oz to 11.5 million oz, its biggest fall since the second quarter of 2008.

“Dehedging continues to surprise on the upside as mining companies race to gain greater exposure to the soaring gold price,” said Matthew Turner, author of the report.

Barrick has subsequently made another cut of one million ounces and AngloGold has an aggressive hedge book reduction programme. “We forecast the global hedge book could fall below 10 million oz by year-end,” London-based metals consultancy VM Group said in the report.

The dollar gold price has broken a string of all-time highs in recent weeks and was last trading at $1,131 an ounce, securing a level comfortably above the psychologically important $1,000 level.

The cost for mining companies to close out all their hedges fell to $5.1bn from $6.5bn in the June quarter.

The closure of hedge positions is regarded as fundamentally bullish for the gold price because the metal is bought on the spot market to close the contracts, increasing demand for the metal and contributing towards nudging prices up.

"On average in the eight years since 2002 gold dehedging has meant an additional 12.0 Moz (374t) of gold demand (or alternatively it can be seen as that much less supply)," Turner said, adding this was more than South African gold production or US jewellery demand over the same period.

"But clearly this cannot go on forever, and indeed this aspect of dehedging together with its relevance to the global supply and demand balance, is coming to an end."

The less positive news in the report was the steady downward trend in demand for gold to back exchange-traded funds. In the third quarter, the world’s 17 ETF providers saw the take up of just 42,000 kg of gold against 47,000 kg the previous quarter and 459,000 kg in the first quarter. VM Group noted just 7,000 kg flowed into ETFS in October.

There are close to 1,800 tonnes of gold held in ETFS.

Some market commentators have raised the fear that if sentiment turns against gold there are tonnes of gold that could flow out of ETFs onto the market and, applying basic supply-and-demand principles, this could drag prices down sharply.

The central banks are also playing less of a role in the market.

"The official sector has been a net purchaser of gold in every month since May. This is more to do with a collapse in sales of gold rather than new purchases, which has been somewhat exaggerated," Turner said.

European central banks sold on average 13.1 tonnes of gold a month in the year to end-September 2009 against an average of 34.5 tonnes/month btween September 1999 and September 2008.

The biggest seller is the International Monetary Fund, which is disposing of 403 tonnes of gold. It was reported that India had purchased 200 tonnes of gold but by the start of November this sale had not been settled.