Gold hedg­ing makes a come­back

Some pre­dict a bull run for the yel­low metal – did those hedg­ing make a wise choice?

Finweek English Edition - - THE WEEK - Ed­i­to­rial@fin­week.co.za

gold hedg­ing – sell­ing gold at a pre-de­ter­mined price be­fore it is mined – be­came a dirty cou­ple of words in the min­ing in­dus­try es­pe­cially as the price of bul­lion be­gan to in­crease shortly af­ter the 2008/09 global eco­nomic and fi­nan­cial cri­sis.

At that point, gold was about $800/oz be­fore adding $1 000 to its value by 2011, when it traded at about $1 800/oz. Lock­ing in prof­its in the teeth of a bull mar­ket hardly made any sense.

In any event, in­vestors could all too well re­mem­ber the tra­vails of Ashanti Gold­fields, which al­most went bank­rupt af­ter burn­ing its fin­gers on ex­otic de­riv­a­tives con­tracts. An­gloGold Ashanti, mean­while, paid $1 300 per gold ounce to can­cel its hedge book in 2010 at a cost of $2.6bn – it was a painful ex­er­cise, but it saved it­self bil­lions of dol­lars over the next few years as gold soared.

Funny, then, that gold hedg­ing had made a mi­nor come­back in the first quar­ter of 2016.

Ac­cord­ing to JP Mor­gan Cazen­ove’s com­mod­ity team, some 79.6 tons of hedg­ing was an­nounced in that pe­riod alone com­pared to only 9.2 tons in the whole of 2015. What’s strange about this is that gold staged a re­vival in the first quar­ter of this year af­ter sev­eral years of re­trac­tion – a de­vel­op­ment that sug­gests in­vestors think the re­cov­ery of bul­lion could give way to volatil­ity.

“JPM feels that hedg­ing strat­egy in Q1 shifted from pro­tect­ing spe­cific projects at the be­gin­ning of the quar­ter to­wards more strate­gic though still short du­ra­tion hedg­ing to­wards the end as pro­duc­ers found it in­creas­ingly more pru­dent to lock in hard­earned prof­its,” said John Bridges, an an­a­lyst for JP Mor­gan. The view of

is that banks might be con­cerned gold is peak­ing hence the pres­sure on their clients to take ad­van­tage of the strong price now.

“I un­der­stand if peo­ple feel pres­sure to do it and if they do it in small chunks maybe it’s not that bad,” he said. “Re­mem­ber that global [gold] sup­ply is prob­a­bly 2 000 tons. So if you an­nu­alise it [79 tons over 12 months is 6.6 tons a month] it’s still quite small.

“Philo­soph­i­cally, we don’t be­lieve in the risk,” said Hol­land. “We don’t be­lieve in putting a prod­uct on to the mar­ket be­fore you’ve even pro­duced it,” he added.

Peter Steenkamp, CEO of Har­mony Gold, ac­knowl­edged hedg­ing metal was “a tool you can use”, but his com­pany’s pref­er­ence has been to hedge the cur­rency as an al­ter­na­tive means of min­imis­ing gold mar­ket volatil­ity.

Har­mony an­nounced in Fe­bru­ary that it would hedge about a third of its rand re­ceipts for about R6.2bn. In other words, it has es­tab­lished a min­i­mum and max­i­mum ex­change rate at which its fu­ture dol­lar gold sale pro­ceeds could be ex­changed into rand. “This has stood us in good stead with all the volatil­ity in the cur­rency this year,” said Steenkamp.

He added that the group would keep an eye out as to a good time to lock in gold sales, a tac­tic which Rand­gold Re­sources CEO, Mark Bris­tow, also said he was not averse to. “We do it when we’re start­ing up a project or clos­ing it; for in­stance, we hedged the fi­nal pro­duc­tion of Mo­rila [a gold mine in Mali] just to en­able us to push it to shore,” he said.

Bris­tow doesn’t be­lieve now is a good time to hedge gen­er­ally, how­ever. “Large-scale hedg­ing is a joke. And the stars are align­ing for an­other gold bull run, which you’re see­ing with all the po­lit­i­cal tur­moil across the globe,” he added.

Said Hol­land: “The long-term fun­da­men­tals for gold is very pos­i­tive with pro­duc­tion hav­ing come off last year. Cen­tral banks are buy­ing; ETFs [ex­change-traded funds] have gone up.

“The fun­da­men­tals are good but it’s go­ing to take a while to run through the sys­tem. We haven’t seen that yet, but I think be­tween now and then you can ex­pect some volatil­ity,” he said.

At the time of writ­ing, the gold price in dol­lars has in­creased nearly 18% year-to­date from $1 060/oz to $1 250/oz whereas in rand, the in­crease in the price re­ceived by SA gold min­ers has in­creased about a fifth. At R630 000, the rand gold price is at its high­est for at least five years.

“The long-term fun­da­men­tals for gold is very pos­i­tive with pro­duc­tion hav­ing come off last year.

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