Gold Bulls deeply suspicious of Hedging FT 2014 PDF

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The Commodities Note Polyus Gold International Ltd

Gold bulls deeply suspicious of hedging

Neil Hume, Commodities Editor JULY 9 2014

To hedge, or not to hedge?

Comment by email

It’s a and goes right to the heart of the question about why investors buy gold shares

– to gain exposure to a rising gold price or invest in the exploration and development skills of miners. Julian Baring, the UK fund manager dubbed the “Gold Guru”, once reportedly said he did not like hedging because behind every hedge there was invariably a ditch and these are usually wet and miserable places. That was certainly the case in the early 2000s as the gold price took off and panicked miners spent billions of dollars closing their hedge positions. The 1990s were not much better, when excessive hedging by the industry (and central bank gold sales) pushed the price of gold below the cash cost of production.

But for others,

. At the end of March, the total amount of future gold production hedged, known as the global “hedge book”, stood at 87 tonnes – just 2 per cent of mine supply and a fraction of its 1999 peak of 3,000 tonnes. But there are signs that sentiment is starting to change. Last week Polyus Gold International, Russia’s largest producer of the precious metal, announced the biggest hedging transaction since the buybacks executed by AngloGold Ashanti and Barrick Gold in 2008-09. The programme will enable Polyus Gold to keep investing in Natalka, one of the largest undeveloped gold deposits in the world and means the industry will return to net hedging this year, according to Thomson Reuters GFMS, a research house. But only just. With gold currently trading near $1,300 a troy ounce and the market in modest contango, GFMS, which publishes a quarterly analysis of the global hedge book, does not see any of the large gold producers following the lead of Polyus Gold.

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“Perhaps put it to shareholders that the board would like to hedge 5 per cent of production in 2014, 10 per cent in 2015, 15 per cent in 2016, 20 per cent in 2017, 25 per cent in 2018 and then maintain that 25 per cent in perpetuity,” they suggest. This would offer the best of both worlds – neither the all-in approach of the 1990s nor the current zero-tolerance approach to hedging, says Citi.

The Commodities Note is an online commentary on the industry from the Financial Times

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