Gold Miners 'Don't Think Price Will Fall', Hedging 'Still Isolated'

But gold-miner industry "fundamentally unhealthy" as 2014 price drop hits 60% of output...

 

GOLD MINERS are still not hedging their future production despite the recent price-drop to new 4.5-year lows, says the latest expert analysis, as zero interest rates and falling energy prices are deterring forward sales to lock in current prices.

 

"There is not yet compelling evidence to indicate an extended rise in the volume of hedging by gold miners," says Matthew Piggott, senior precious metals analyst at Thomson Reuters GFMS, introducing the consultancy's Q3 2014 report for French investment bank and bullion market maker Societe Generale on Tuesday.

 

Growing 57 tonnes by weight in the first 9 months of 2014, the global gold mining hedgebook – the amount of unmined production effectively sold in advance to lock in prices – fell between July and October, says GFMS, dropping some 6 tonnes as new output was delivered to meet existing contracts.

 

Totaling some 148 tonnes by end-September however, the gold mining industry's unrealized short position rose by value thanks the drop in gold prices, reaching $440 million equally split between forward sales and options contracts, which give a miner the ability to sell gold at a pre-agreed level should prices fall.

 

The 2014 drop in gold's average price, now down 10% from 2013, means "the mining industry is in a fundamentally unhealthy state," GFMS's report goes, "with projects shelved, exploration expenditure cut back and sustaining capital being thrifted or deferred where possible."

 

While GFMS says "these effects will become more severe" if gold prices drop to $1100 per ounce – putting some 60% of the industry underwater on its analysis of "all-in" costs – today's low interest rates, plus memories of the huge over-hedging seen in the late 1990s, are deterring management from protecting against further falls.

 

Low rates mean there is no "attractive premium" to current prices offered by forwards rates – the price-curve calculated from storage and interest charges on future deliveries of gold, known as "contango".

 

"To hedge in the absence of premium [would] signify that a producer believes the price will fall," says Piggott at GFMS. So "while we may see some isolated instances of companies entering into [hedging] positions, we maintain our view that conditions in the market are not yet aligned for a return to producer hedging en masse."