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.