Gold won't gain from de-hedging, says report

De-hedging by producers may not support gold prices because the activity is likely to see a "marked slowdown through 2009", according to a joint report by GFMS and Societe Generale.

De-hedging is a process by which producers buy back gold positions that were earlier sold in forward markets, so as to lock in the revenue. In the October-December period of last year, de-hedging activity slowed to 48 tons (1.54 million ounces), the lowest during 2008, leading to a 9 per cent fall in end-December outstanding hedge book to 358 tons, or 11.52 million ounces, the report said.

"Producers' hedge buybacks are evidently having a positive effect on realised prices, which decreased by $35 per ounce from the third quarter of 2008, compared with a decline in average spot gold price of $77 an ounce," GFMS said.

Since 2000, gold prices have risen from $290 an ounce to the current $905, hitting a record $1,032.35 in March 2008. During the fourth quarter of 2008, global producers, such as AngloGold Ashanti, Kinross Gold Corp, Mineral Deposits, and Barrick Gold Corp together cut 32 tons of gold hedge.

"For the full year, the biggest contributors were AngloGold at 161 tons and Barrick at 78 tons. Despite this activity, they are still the holders of the two largest hedge books, comprising two-thirds of the outstanding delta-adjusted position," GFMS said.

However, other prominent producers like Buenaventura, Newcrest, and Sino Gold have reduced their hedge positions to nil during the fourth quarter of 2008, which would substantially reduce de-hedging activity in the current year, it said.

Investors tend to be opposed to hedging, and current market conditions are also less favourable to forward sales, given the premium in the forward curve, GFMS said.

"This will limit fresh hedges to banks requiring revenue protection in return for project finance, active management of hedge positions and a minority of companies choosing to hedge in spite of investor opinion," GFMS said.

The value of the global book on a mark-to-market basis has eased from over negative $10 billion at end-December 2007 to negative $5.8 billion, lightening the liabilities on the balance sheet of many gold companies.