Facts ‘n’ figures: GFMS finds gold hedging back in fashion

The following is the summary portion of 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 notable as being a second consecutive quarter of net hedging, adding 190,000 oz. (6 tonnes), building on a similar amount in the first quarter. Much of this increase was 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 continued to deliver into and run down hedge positions, there were a limited number of new hedges entered into during the quarter. Most notable of these was Alkane Resources, which entered into a 90,000-oz. (3 tonnes) 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.

For the second half of the year, we forecast net hedging again, leaving the total net addition to the global book at around 1 million oz. (32 tonnes) for the full-year.

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

On this basis 2011 will be the first year of net hedging on an annual basis since 1999; an end to 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, the pressure is currently still on company management from investors to retain full exposure to rising prices.