Facts ‘n’ Figures: GFMS says Gold hedging back in fashion

The following is an edited excerpt from the report Global Hedge Book Analysis Q2: 2011, which is produced by Thomson Reuters GFMS and available in full at www.gfms.co.uk.

The second quarter of 2011 was the second consecutive quarter of net hedging, adding 190,000 oz., or 6 tonnes, and building on a similar amount in the first quarter. Much of the increase came from additions to the options portion of the book and changes in the volume of gold delta hedged against existing option positions, with the total options book growing by 12% quarter-on-quarter.

While some producers delivered into and ran down hedge positions, there were a limited number of new hedges entered during the quarter. Most notable of these was Alkane Resources, which entered into a 90,000-oz., or 3-tonne, forward sale to hedge revenue risk relating to the Tomingley gold project in New South Wales, Australia, at a strike price of A$1,600 per oz.

Despite the increase in the end-quarter gold price, used to value the option contracts, the total marked-to-market liability of producer’s hedge positions fell by US$152 million. This was because reductions to the book were to contracts, which were a greater liability when marked to market than the newer positions which replaced them, at generally higher strike prices.

We forecast net hedging until 2012, leaving the total net addition to the global book at around 1 million oz., or 32 tonnes, for the year.

This forecast is based on the expected interplay of hedging and de-hedging, and the additional delta hedging against option contracts, based on our price outlook for the remainder of the year.

This year will be the first to net hedge on an annual basis since 1999, ending an 11-year hiatus. 

It would be wrong to assume, however, that general attitudes to hedging amongst the major gold mining companies have changed. In the face of a strongly rising gold price, investors pressure company management to retain full exposure to rising prices.