De-Hedging Trends Remain Bullish for the Price of Gold

The latest quarterly hedge book analysis from compiled by GFMS Ltd. for Société Générale was released on June 13 and shows net dehedging in the first quarter of 2009 was 3 tons.

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This data is important because it provides insight into the direction of the price of gold. If gold producers are de-hedging they are reducing the supply of gold on the market which should theoretically increase the price of gold. If companies are hedging, it puts downward pressure on the price of gold. Hedging isn't the only institutional force that puts downward pressure on gold prices. Other major actions that put downward pressure include central bank & IMF sales and central bank gold leasing. Analysts believe company de-hedging over the past several years has been one of several reasons that the price of gold has moved near $1,000 an ounce over the past year or so.

So what does GFMS/Société Générale say about the gold producer's hedge book?

The one large hedge buy-back in this quarter came from AngloGold Ashanti as they restructure their hedge portfolio to take advantage of higher gold price forecasts. The majority of the remaining hedge book is held by Anglogold Ashanti and Barrick Gold.

The global value of the producer hedge book was steady at negative $5.8 billion in Q1 2009.

Also of interest was the statistic that producer prices increased by 15 percent, rising from $783 an ounce in Q4 2008 to $897 an ounce in Q1 2009 (see chart below).

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There are currently 1.4 million ounces (44 tons) of contracts with maturity dates in 2009. The chart below shows the scheduled delivery of contracts currently and formally planned by global producers. Because AngloGold Ashanti and Barrick Gold control the majority of the hedge book, decisions they make can swing these plans sharply.

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GFMS and Société Générale expect mining companies to continue to remove hedges at a higher rate than suggested by the delivery profile (see chart above) and do not see a return to wholesale hedging by major producers.

Fresh hedges in the first quarter of this year were related to project finance in a period of unprecedented illiquidity.

Moreover, investors want to invest in gold mining companies that are unhedged in this era of rising gold prices.

As a result, GFMS/Société Générale expect gold producers to further remove hedges at a faster rate than the delivery profile suggests.

This would be bullish for the price of gold.

Best,

The Gold Stock Strategist