Global hedge book falls

The international gold hedge book, representing the cumulative hedging activities of 85 producers and 67% of global output, fell once again in the first quarter of 2003, to 77.3 million oz. (2,404 tonnes) — a decline of 3.8 million oz. (119 tonnes).

The total decline over the past 12 months has been 20.8 million oz. (647 tonnes), according to Gold Hedging Indicator, a quarterly publication produced by Toronto-based Haliburton Mineral Services and London-based Virtual Metals Research & Consulting.

To put the decline in context, Gold Hedging Indicator points out that the reduction in hedging over the past 12 months is 64% higher than South Africa’s entire gold output in 2002. The recent strong gold price, combined with low interest rates, has considerably weakened the ability of gold producers to lock in prices via hedging, and gold has once again become more of a “pure” price play for investors.

The rising U.S. dollar gold price and falling gold hedging indicator became disassociated during the latest quarter, as the rally in the gold price faltered in the first quarter of 2003. Nevertheless gold producers continued to reduce their hedging commitments. This was mainly reflected in a reduction in net forward positions, and to a lesser extent in call options and other, more exotic positions. However, the overall decline was slightly offset by an increase in put-option positions.

In terms of years of production committed to price protection programs, the collective gold producers still had 1.5 years of output tied to hedging at the end of the first quarter of 2003.

Australia’s commitment to hedging remains the highest, at two years, but this was down from the 2.9 years registered at the end of 2001. The lowest level of exposure comes from the African-based mining companies, at 1.3 years, down from 1.7 years at the end of December 2001.

Jessica Cross, CEO of Virtual Metals, says the widespread acceptance that the stronger tone in gold prices will likely be maintained in the near term has dramatically changed the hedging strategies of gold producers.

On a net basis, the Americas totalled 42.8 million oz. (1,331 tonnes) at the end of March 2003, down 1.8 million oz. from the fourth quarter of 2002. Over the same period, the African hedge book eased to 18.4 million oz. (571 tonnes), down from 20.5 million oz. (636 tonnes) in the previous quarter. Hedging associated with the Australian producers fell sharply in the second quarter of 2002 and again in the fourth quarter; these reductions did not reflect efforts on behalf of Australian producers to reduce their hedge books; rather the reductions were due to the consolidation of the mining industry. In the latest quarter, the Australian hedge book actually rose marginally to 16.1 million oz. (502 tonnes), reflecting an increase in the number of net puts outstanding.

The calculations are based on data from NM Rothschild, which finances GHI.