Update: Gold Mining Stock Hedge Ratios

By Brad Zigler

Yesterday's Desktop column ("Investors Thinking: Time To Hedge Gold Stocks?") recapped a strategy for hedging gold mining stocks originally presented in "More On Hedging Gold Stocks."

Some readers wonder why a hedge would ever be needed. One, in particular, wrote, "If you think gold prices are going to run out of steam, far better to reduce your position, or consider tight stops."

That's true. It would be better, under most circumstances, to just take your money off the table. However, some investors may not be willing or even able to liquidate their positions at will. Short-term shareholders who'd pay the ordinary income tax rate on their profits might prefer to defer sale until their holdings qualify for the lower long-term capital gains rate. A hedge could buy them time.

Fiduciaries, such as estate executors, too, may be unable to sell portfolio assets without a court order, but are still obliged to take steps to preserve value for the beneficiaries. A hedge could dampen volatility until approval can be obtained.

For those who think the relation between gold miners share prices and gold is too volatile and asymmetric to make hedging reliable work, keep in mind that hedges should be contemplated only as short-term bridges over periods of excessive gold volatility, not permanent portfolio fixtures. Hedging, for example, might be appropriate while conducting an orderly liquidation of a large position in a volatile gold market.

Again, it must be noted that the risk being hedged when using the PowerShares DB Gold Double Short ETN (NYSE Arca: DZZ) is that presented by gold itself. Equity market and management risk remain. To hedge the totality of a gold stock's risk, options, if listed, may have to be employed. A short position in the Market Vectors Gold Miners ETF (NYSE Arca: GDX) could provide equity market protection as well. These positions, though, may not be appropriate for all investors. Short positions, for example, aren't countenanced in retirement accounts. The DZZ note provides short gold exposure without the need for margin.

Below are current one-year hedge ratios for a dozen popularly requested gold mining issues. Half of the issues (Goldcorp, Inc., Hecla Mining Corp., Yamana Gold, Inc., Newmont Mining Corp., Gold Fields Ltd., and Eldorado Gold Corp.) were profiled in the list appearing in last year's "More On Hedging Gold Stocks" column. Hedge ratios for these issues are higher this year, indicating the mining stocks' relative volatility has increased.

All the more reason, perhaps, to consider hedging ...

Gold Miners Hedge Ratios

Company	1-Year Return	Hedge Ratio (vs. DZZ)
Goldcorp, Inc. (GG)	91.5%	1.44
Kinross Gold Corp. (KGC)	42.7%	1.52
Gammon Gold, Inc. (GRS)	126.7%	1.71
Silver Wheaton Corp. (SLW)	297.0%	1.74
Coeur d'Alene Mines Corp. (CDE)	333.1%	2.44
Hecla Mining Corp. (HL)	238.3%	2.50
Yamana Gold, Inc. (AUY)	155.8%	1.56
Agnico-Eagle Mines Ltd. (AEM)	73.3%	1.50
Newmont Mining Corp. (NEM)	84.1%	1.28
Barrick Gold Corp. (ABX)	72.1%	1.38
Gold Fields Ltd. (GFI)	113.8%	1.67
Eldorado Gold Corp. (EGO)	148.5%	1.64

Disclosure: Author owns none of the above-mentioned stocks.

Comments

[sixpackistan:]

Great idea. Good suggestions. Thanks.

Nov 10 04:18 PM

[JeffDB:]

Thanks for the article and the followup explanation. I was wondering where the hedging would be appropriate vs just liquidating some or all of a position. That explains it.

Nov 10 06:27 PM

[Duffminster:]

I think a lot depends on whether the spec longs and the new fund entries into gold understand that the ultimate price of gold and beating the commercials and bullion banks and their masters at the gold and silver suppression scheme will only come when there is relative consensus among those funds that the amount of physical silver and gold in the futures market is quite small relative to the various paper proxies and that short positions are highly concentrated among a few players who usually get there way short term around options expiry and more importantly to turn off their black boxes, buy and hold only physical gold and silver and not futures or ETFs, do not do so on margin, and simply keep accumulating physical silver from COMEX and other resources and play the long game to WIN.

The long specs just can not control the many tricks that are used to flush the longs over and over again such as margin increases, double short ETFs and huge increases in paper short positions.

You can not beat the house at their own game. In the war to win fair market prices of gold and silver the High Ground must be taken. The high ground belongs to those who hold the physical metals. It is a longer term game and requires investors who understand the longer term paradigm and the true rarity of the physical metals.



The other important point is that silver can be a lever or a drag on gold and it seems like the the game the cartel is playing now is to use silver as a drag to slow gold's advance until they can muster enough physical gold to try to take gold back.

The same funds I refer to above can use silver to lever Gold higher by taking delivery of lets say $100 Million in Physical Silver from Comex and get a lot of leverage on Gold but they need to act fast in my opinion.

I could be completely wrong. Most of what I learned is is just from reading the essays and daily posts at GATA but those guys know something none of the other gold analysts ever seem to talk about in regard to Fed Leases and Swaps and other Central banks long term selling and how things are changing.

Take the high ground and get physical.

Nov 10 10:53 PM