Q3 global gold hedge book falls another 2 million ounces
As gold hedging falls out of favour with the gold mining majors, the global gold hedgebook continues to fall sharply as the latest VM Group report details.Author: Lawrence Williams
Posted: Friday , 19 Nov 2010
The latest report on gold hedging/dehedging from the analysts at VM Group and Haliburton Services on behalf of ABN Amro Bank doesn't really tell us anything new. To an extent holding big gold hedge positions has become a real negative for gold majors in particular and those that held hedge positions have been unwinding them over the past few months showing that their managements are fully convinced that the gold price is going to continue to rise.
On the other hand, some small and medium sized gold miners are still hedging some gold forward - often as a term of the lending conditions from those providing mining finance- for new project development. Bankers still see mining as a risky business and they are keen to protect their positions - but at least nowadays hedges coming in at current price levels for the most part offer those involved decent cashflow for the foreseeable future - hence the recent comment by log time anti-hegder, Graham Birch, that perhaps gold miners now should be reconsidering their hedging policies (see Should gold miners be returning to hedging?)
The VM Group report showed that global hedging fell 2.0 million ounces quarter-on-quarter which is the largest fall for three quarters. But, of course the major part of the reduction was from AngloGold Ashanti - the last of the gold majors to unwind its hedge book. as AngloGold Ashanti closed out the entirety of its positions.
This meant that the global delta adjusted headline figure sunk to 5.5 million ounces, down by more than two million ounces from the previous quarter, and 6.5 million ounces from the same period in 2009. As the analysts point out. the fall would have been more pronounced, had AngloGold managed to unwind its entire hedge positions by the end of the quarter under, with a further 1.37 million ounces (on a committed basis) closed out in the first week of October. Overall, AngloGold has now spent $2.63 billion to buy back the remaining 2.7 Moz of committed ounces.
The analysts note that at the end of Q2 2010 AngloGold had almost 3.22 Moz of committed gold contracts remaining on its book. The average price paid by AngloGold to close out all outstanding gold hedge positions was $1,300/oz, which suggests that the bulk of the buyback was completed during the period 15 September-7 October, when the gold price averaged that same amount.
They also comment that the fact that AngloGold under CEO Mark Cutifani has sufficient confidence in the gold market for it to close out its hedge positions and gain full market exposure appears bullish for the gold price, but as the last gold major to unwind its book it also removes a key area of support.
The impact of the close out of the last gold mining major's hedge book does have implications for the gold supply/demand position. Dehedging, the analysts comment, has been an important source of gold demand in the past ten years, with about 105 million ounces of gold on a committed ounce basis having been bought back from the global hedge book since 2001. This averages about 11.67 the average annual demand from gold-backed ETFs since their introduction in 2003, which has averaged only 9.55 million ounces .
Although in the current year , to end-September, gold ETFs grew by 10.77 million ounces and dehedging by 6.6 Moz , the VM group analysts comment that the removal of significant hedging leaves the market at the mercy of the investment community, and the hope that Central Banks remain net purchasers in the light of the current global economic turmoil.
VM Group notes that in addition to AngloGold, there were a few others who closed out gold hedge books, including Aurizon Mines, Dragon Mining, Norton Gold Fields and PanAust. But in aggregate, at just 0.34 Moz, these were minimal compared with AngloGold's 1.85 Moz. In terms of products, the net fall was largely due to the buyback of calls sold by AngloGold, but there was also an appreciable decline in forward sales in the Americas and Australia regions. There was only very limited offset from new hedging activity.