Gold de-hedging at 9% in June quarter: Societe General

Indicates gold price to go up this year

In a major indication for a rebound in gold price this year, global producers have squared off their long positions in commodity exchanges. Consequently, global miners reported 9 per cent decline in gold hedge in the second quarter of the current calendar year.

A Societe General study conducted by Thomson Reuters GFMS titled "Global Hedge Book Analysis 2Q '15" reported hedging in the overall gold holding of producers at 5.69 million oz (177 tonnes) for the quarter ended June 2015, a decline of 0.54 million oz (17 tonnes) from the previous quarter.

This means, global gold producers de-hedged (squared off or abstained from hedging) of their positions amid fear of an upsurge in prices.

"Gold miners normally hedge on fears of declining prices to protect their margins from further fall. But, their squaring off position in the second quarter indicates they are sure of price recovery," said Gnanasekar Thiagarajan, Director, Commtrendz Research.

In total, 30 companies reduced their delta-adjusted hedge books during the period. This activity was only partially countered by new hedges from other gold miners. Also, little new hedging activity has been reported to have taken place since the end of June.

After a brief recovery during the first week of April, gold failed to break above $1220 an oz as the Fed hinted of a June rate hike the following week. Speculation rose marginally amongst money managers, but as cumulative turnover of COMEX gold futures remained subdued, gold came under pressure causing it to trade range bound between $1190 an oz and $1220 an oz.

During the first week of July, gold struggled to close above $1170 an oz despite worries Greece would leave the Eurozone. Weak safe-haven bids carried into the second week as fears failed to spillover the US equity market. Over this period, the S&P500 held above a 4-month low, damping gold volatility, the report said.

Gold is currently trading at $1140 an oz.

While gold prices had slipped to a 5-year low on expectation of a near-term hike in interest rates, other commodities underwent a similar fate as worries spread over the stability of the Chinese economy. These fears were reinforced on 31st July, after US GDP data pointed towards a strong Q2, closing gold's longest weekly losing run since 1999.

The report forecast that the gold miners' third quarter reports will contain evidence of further small hedges and expansions of existing hedge positions, particularly by Australian operators seeking to take advantage of the recent gains in the Australian dollar gold price.

Modestly sized project finance related hedging agreements are also a strong possibility, although a number of recent announcements have highlighted the growing significance of streaming agreements as a component of new finance arrangements. However, in the absence of a large-scale hedge this year so far, it seems increasingly unlikely that substantial net hedging will be the end result for 2015, unless a major new hedge is undertaken.

Based on the activity reported to date, we now consider it probable that modest net de-hedging will be the outcome for the year, the report said.