De-hedging key reason for increase in gold prices

By

Shashank Shekhar on Thursday, December 17, 2009

De-hedging by gold producers has emerged as one of the prime reasons for the rise in gold prices, analysts said.

A total of 105 tonnes of gold was de-hedged by producers in the third quarter of 2009 and it played a tremendous in raising the price of gold by nearly $50 an ounce. Though the volume of gold de-hedged – primarily by companies like global miner Anglo Gold Ashanti and Canadian miner Barrick Gold – in the final quarter of 2009 is expected to be large, no data in this regards is available as yet.

The bullion rose by almost $200 an ounce in the final quarter of 2009.

"De-hedging by miners is one of the prominent reasons for the rise in gold prices. The producers initially held their expected god production with an expectation that gold prices will fall in future. They then de-hedge when they expect prices to rise in future," said Rozanna Wozniak , the investment research manager with the World Gold Council. "The amount of gold de-hedged by producers steadily rose from the first to the third quarter of 2009."

According to World Gold Council (WGC), while one and 31 tonnes of gold were taken off the hedge books in the first and second quarter of 2009 respectively, a whooping 105 tonnes was de-hedged from the forward contracts in the third quarter of 2009. One of the most observable events with regard to the de-hedging of forward contracts in recent months was the announcement by Barrick Gold that it would completely scrap the fixed price gold sales contracts within a one-year timeframe.

The Q3 represented the first three months of this period and consequently the company removed 2.50 million ounces of contracts. Barrick has also removed the balance of 2.9 million ounces in the fourth quarter to date.

Together with a reduction from AngloGold Ashanti of 0.48 million ounces, and smaller deliveries from producers, global de-hedging was recorded at 3.18 million ounces. This left the global hedge book standing at 11.55 million ounces at end-September.

"The marked-to-market liability of the producer book contracted to negative $4.5 billion at end-Q3, an improvement of $1.7bn from the second quarter of 2009. Producers' weighted average realised prices kept pace with the increase in the period average spot price, rising by four per cent in Q3, to $943.81 an ounce for the subset of hedged producers studied," said London-based gold markets analyst GFMS.

Market insiders said the phenomenon of de-hedging has continued for long. "If you de-hedge the fundamentals, you expect the gold prices to rise in future," said Jeffrey Rhodes the CEO of Dubai based INTL Commodities DMCC. Read more...

Gold hits record near US$1,200 as dollar slips

LONDON -- Gold hit record highs near US$1,200 an ounce on Tuesday as dollar weakness fuelled buying of the metal as an alternative asset, while investors speculating on more gains were cheered by recovery from last week's setback.

Spot gold hit a peak of US$1,198.70 an ounce and was bid at US$1,190.20 an ounce at 1315 GMT, against US$1,179.10 late in New York on Monday.

"The fact that we are seeing the dollar weaken is helping to drive gold," said Ole Hansen, senior manager at Saxo Bank.

He said investors had been encouraged by the strength of gold's recovery after it fell to below US$1,140 an ounce last week, with the fall being met with strong fund buying.

"Everyone was waiting for that correction, and the way gold recovered suggested there was a lot of buying lurking in the wings (among) people who missed the opportunity to get into the market in the first place," said Mr. Hansen.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange also hit a record US$1,200.50 an ounce and were later up US$9.40 at US$1,191.70.

The dollar index, which tracks the U.S. currency's performance against a basket of six others, fell on Tuesday as more clarity about Dubai's debt situation eased some concerns over the region's stability, lifting risk appetite.

The dollar also pared gains against the yen after comments from the Bank of Japan on monetary policy.

Weakness in the U.S. unit boosts gold's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.

Other commodity prices also firmed on the back of the weaker dollar, with base metals firming and oil rising more than half a percent to nearly US$78 a barrel.

Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.

Elsewhere the world's biggest gold miner, Barrick Gold Corp., said on Tuesday it has completed the elimination of all of its gold hedges as planned. De-hedging has represented a significant source of demand in recent years.

During times of weak prices, gold miners often sell a portion of their future production to protect, or hedge, against the possibility that prices will fall.

When prices rise, as they have done since 2001, the company suffers because the value of the future production it has sold does not increase with the gold price.

In the physical market, the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings rose 2.134 tonnes to 1,129.994 tonnes as of Nov. 30.

Indian gold offtake abated on Tuesday as prices resumed their upward trend, after a modest pick-up in recent sessions when traders stocked up ahead of wedding demand.

Sales of scrap persisted in other parts of Asia on Tuesday, cutting premiums, dealers said.

Analysts say they expect the gold market to continue taking support from fund and other investment demand, and further buying from central banks.

News in early November that India's central bank had bought 200 tonnes of gold, followed by acquisitions by Russia, Sri Lanka and Mauritius, sparked a 13% price rise that month.

"We expect to see further announcements of Central Bank gold purchases over the coming months as these banks realign their U.S. dollar and other asset holdings," said Fairfax analyst John Meyer in a note.

On the supply side, Harmony Gold Mining Co., the world's No. 5 gold miner, said output was suspended at a South African shaft on Tuesday after a fatality.

Among other precious metals, spot silver was bid at US$18.64 an ounce against US$18.45.

Platinum was at US$1,465.50 an ounce against US$1,452, while palladium was at US$376.50 against US$363.50, having earlier touched a high of US$379 an ounce, its firmest since August 2008.

© Thomson Reuters 2009

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