De-Hedging Trends Remain Bullish for Gold Price

The latest quarterly hedge book analysis compiled by GFMS Ltd. for Société Générale was released on June 13 and shows net dehedging in the first quarter of 2009 was 3 tons.

click to enlarge


This data is important because it provides insight into the direction of the price of gold. If gold producers are de-hedging they are reducing the supply of gold on the market, which should theoretically increase the price of gold. If companies are hedging, it puts downward pressure on the price of gold. Hedging isn't the only institutional force that puts downward pressure on gold prices. Other major actions that put downward pressure include central bank & IMF sales and central bank gold leasing. Analysts believe company de-hedging over the past several years has been one of several reasons that the price of gold has moved near $1,000 an ounce over the past year or so.

So what does GFMS/Société Générale say about the gold producer's hedge book?

The one large hedge buy-back in this quarter came from AngloGold Ashanti (AU) as they restructure their hedge portfolio to take advantage of higher gold price forecasts. The majority of the remaining hedge book is held by Anglogold Ashanti and Barrick Gold (ABX).

The global value of the producer hedge book was steady at negative $5.8 billion in Q1 2009.

Also of interest was the statistic that producer prices increased by 15 percent, rising from $783 an ounce in Q4 2008 to $897 an ounce in Q1 2009 (see chart below).

There are currently 1.4 million ounces (44 tons) of contracts with maturity dates in 2009. The chart below shows the scheduled delivery of contracts currently and formally planned by global producers. Because AngloGold Ashanti and Barrick Gold control the majority of the hedge book, decisions they make can swing these plans sharply.

GFMS and Société Générale expect mining companies to continue to remove hedges at a higher rate than suggested by the delivery profile (see chart above) and do not see a return to wholesale hedging by major producers.

Fresh hedges in the first quarter of this year were related to project finance in a period of unprecedented illiquidity.

Moreover, investors want to invest in gold mining companies that are unhedged in this era of rising gold prices.

As a result, GFMS/Société Générale expect gold producers to further remove hedges at a faster rate than the delivery profile suggests.

This would be bullish for the price of gold.

Disclosure: No positions.

Comments

[Donald Ingram:]

Supply trend is diminishing.
Demand trend outstrips supply.
Price trend is up.
De-hedging is occuring.
Economics not improving.
Financial sentiment still low.
Debt deleveraging ongoing.
Currency pressures growing.
Bankruptcies mounting.
Geopolitical tensions disconcerting.

Ten good reasons to own and hold physical gold.

Jun 19 12:56 PM

[Sheik Rattl...:]

Ten reasons not to own physical gold:

Barely outperformed dollar over the last three months
Trading near all time highs in terms of purchasing power
Transactional cost of ownership
Price trend is down
Actual demand is down
Speculative demand is up
Bubbles don't only happen to other things
Gold isn't the only physical item with worth in the universe
Remember what happened last time gold had a run like this?
Geopolitical tensions have existed since we've had geopolitics

Jun 19 03:44 PM

[Northstar10000:]

The real money will be made in silver. It hasn't moved at all with gold.

Jun 19 10:41 PM

[Whippet:]

Yep. With a Ag/Au ratio of 70:1, silver can't miss. Gold is fairly priced; silver is CHEAP.


On Jun 19 10:41 PM Northstar10000 wrote:

> The real money will be made in silver. It hasn't moved at all with
> gold.

Jun 19 11:32 PM

[Uppai Mappla:]

I am more bullish on Platinum.
Reasons: (a) Auto sector will turn up soon, (b) Increased use of platinum in fuel cells etc, (c) historically platinum prices had been double that of gold; this was true even in 2002 and the 2008 October lows were a striking aberration, (d) Platinum is as much a precious metal as gold so if gold demand reaches crazy levels, attention will shift to platinum as the second precious metal.

In other words, Platinum will do well whether global economy goes up or down, while gold will rally only in an economic collapse.

Jun 20 06:04 PM

[yellowhoard:]

I don't know how you can miss with a long silver/short gold position for the next couple of years.

Jun 20 07:11 PM

[stargold:]

With the USD on the edge of a precipice, the European Banking System probably still holding some suprises, BRIC countries already begining to talk of new reserve currency and Public Trust in Financial Services still Low. Why wouldn't you hold gold.

Talk of a Gold bubble is still being pushed by some of the same people who were warning of a gold bubble in 2004. Arguments that we were in a Gold Bubble then are probably no more true now than then, with gold yet to reach its inflation adjusted peak of the 80's.

Jun 21 01:02 PM

[Sheik Rattl...:]

You wouldn't hold gold because we're in the middle of a deflationary period and because every other time gold has been this high it either crashed or in one case went sharply up then crashed. Unless you're talking about short term trading where I'll agree there's the possibility to make some money, as a buy and hold investment, why would you buy high when everything else is low?

On Jun 21 01:02 PM stargold wrote:

> With the USD on the edge of a precipice, the European Banking System
> probably still holding some suprises, BRIC countries already begining
> to talk of new reserve currency and Public Trust in Financial Services
> still Low. Why wouldn't you hold gold.
>
> Talk of a Gold bubble is still being pushed by some of the same people
> who were warning of a gold bubble in 2004. Arguments that we were
> in a Gold Bubble then are probably no more true now than then, with
> gold yet to reach its inflation adjusted peak of the 80's.
>
>
>

Jun 22 04:20 PM