Financial News Reports Mislead On Gold Hedges

Includes: ABX, AUY, GDX, GLD, IAU
by: Russ Winter

To a thinking person, it's becoming increasingly evident that financial reporters are falling victim to misinformation through phony "leads." These leads typically come from "sources" who have skin in the game or a trading position to covet. One can only assume financial reporters are becoming too lazy to verify the truthfulness of such "leads."

Case in point was two stories about gold mining firms "increasing hedging," as if in some kind of a tizzy fit or panic. First Bloomberg ran the story, and now the Financial Times has joined the fray. It appears sentiment is so negative toward miners and gold that just about anything is believed and published unquestioned.

The reality is the diametric opposite. Producers have reduced forward hedges to only 4,413 futures contracts on the Comex, according to the most recent Commitment of Traders report. This is down from over 200,000 contracts last October and goes along way toward explaining why the Comex gets almost no new physical delivery of gold to its warehouse of late. Lacking in real gold, perhaps some speculators who short the yellow metal prefer to plant false information instead. One glance at the CoT Barchart on producers shows (in red) how absurd this rush-to-hedge story really is.

The reason for the complete lack of producer hedging is easy to discern. First, production is difficult to replace and most firms don't want to sell what they have left at artificially depressed prices. Beyond being bullish on gold, they would rather go down fighting. Remaining shareholders would have no tolerance for hedging now.

Secondly, hedging is often incorporated to secure financing for the construction of new mine projects. Right now, there are few (if any) new projects getting underway.

Finally, I suggest the reason hedging is down is because many firms are moving to shut in marginal high-cost production. High cost production is the type most likely to be hedged. Case in point, Barrick Gold Corp. (NYSE:ABX). It has announced plans to either sell, close or curb production at 12 of 27 mines, representing 25% of total production. Thus, a firm like ABX has every incentive to reduce or even close out hedges. Others such as Yamana Gold, Inc. (NYSE:AUY), which is Canada's fourth-largest gold miner, also just cut production forecasts because of efforts to reduce costs. The list goes on as this industry could be looking at 10% to 20% drops in production as marginal producers need higher gold prices to continue to operate.

Hedging activity should be monitored, but fortunately increased hedging is far down on the list of "to do activities" for producers. Accordingly investors should favor those firms that do not hedge the upside away.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.