Gold prices: Producers raised hedging in June quarter

Quarterly increase indicates that miners wary of price increase, trend reverses in September quarter so far

Gold producers raised their hedge book by eight per cent globally in the April–June quarter, the highest in six years, as protection from price volatility and to save their margins.

Data compiled by precious metals consultancy GFMS Thomson Reuters showed the global producer hedge book amounted to 9.5 million ounces (295 tonnes) during the second quarter of calendar year 2016, a fourth quarterly increase and to its highest level since the second one of 2010. The quarter-on-quarter change amounted to an increase of 0.67 mn oz (21 tonnes), led by 20 producers.

The increase from the March quarter showed mining companies expected a price fall in the short term. Over April, gold continued to trade over a narrow range. News about the possibility of two interest rate increases by the US Federal Reserve this year fuelled interest across risky assets, driving gold and other safe-haven assets lower. Gold slipped to $1,251 an oz, prompting companies to strengthen their hedge book. On Saturday, it traded at $1,326 an oz in the benchmark London spot market.

“Gold miners continued to embrace hedging amid strong prices into early July. Activity appeared to favour forward sales over options contracts, a pattern we do not expect to continue. With the delivery profile for the third quarter pointing to 1.37 mn oz coming off the book, GFMS forecasts a modest de-hedging outcome to emerge,” it reported.

In April–June quarter, Australian gold miners added the highest amount to their hedge book, about 12 tonnes and 29 per cent of the global increase in forward sales. As a result, at end-June, forward sales rose to represent 33 per cent of the total nominal hedge book, an increase of three per cent from the previous quarter

Although the third quarter has so far seen sparse announcements of new hedging activity, the report believes the uncertainty over higher prices in 2016 would get more producers to join the hedging club. Should prices fail to break above $1,400/oz in the third quarter, producers may opt to sit on the sidelines while their hedge books naturally unwind.

Prithviraj Kothari, managing director, RiddiSiddhi Bullions, advises gold consumers to buy on every low, amid expectation of a further rise in its price. “We do not expect the US Fed to hike interest rates more than once this calendar year. This might further strengthen the gold price,” he added.

The delivery schedule at end-June indicated 1.37 mn oz (43 tonnes) of de-hedging was due during the third quarter. The forward sales component amounts to 0.95 mn oz (30 tonnes) of scheduled deliveries, with a smaller contribution from both basic and and exotic options.

G Thiagarajan, Director, Commtrendz, said, “Through hedging, gold producers cover their margins with a negatively bullish view on prices. Based on the US manufacturing data, released on Friday, gold prices are likely to remain neutral to mildly positive in the near future.”

Standard gold closed on Saturday at Zaveri Bazar here at Rs 30,825 per 10g, a decline of Rs 170.