Gold miners remain cautious amid record high prices, avoid hedging despite market volatility
Record-high gold prices are driving big deals and investments in new mines. What they aren’t doing is making companies hurry to lock in prices as protection against the market suddenly turning down.
Hedging—a practice that helps to guarantee a certain price for future output—is common among producers of commodities ranging from copper to natural gas. But it has been eschewed by the gold-mining industry after companies got caught on the wrong side of trades made during previous bull runs by the precious metal. In 2009, Canadian giant Barrick Gold bought out unprofitable hedges at a cost of more than $5 billion.
So, with spot gold prices hitting a record intraday high around $2,195 a troy ounce on March 8 and increased interest rates making hedging more attractive than it has been for a decade, the question was whether big miners would blink.
The answer: Few did. “Our policy is very clear: We do not hedge gold,” said Tom Palmer, chief executive of Denver-based Newmont , the world’s biggest gold miner. In 2007, Newmont spent $578 million to buy out its hedge book. “When gold goes for a run, we get the full advantage of it,” Palmer said.
The combined hedge book of gold miners rose by around 10% in 2023 as gold climbed to new highs, according to preliminary estimates from the World Gold Council, an industry body.
But, at roughly 192 metric tons, total hedges remain negligible compared with the bets the industry once placed. At the start of the 2000s, the gold-mining industry reported hedges totaling about 3,000 tons.
Signs of gold miners hedging are closely watched because of the impact it has on global supply. When miners unwound big hedges before, it helped to stoke a rally in gold prices. A return to hedging would likely have the opposite effect.
Most new hedges agreed in recent times are mandated by lenders to guarantee returns from new projects, and typically span a year or two instead of a decade.
Jim Beyer , chief executive of Regis Resources , a roughly $1 billion Australian gold producer, recently signaled relief at ending an onerous hedge book agreed years ago at roughly half of today’s gold price.
“If I can borrow some words of the very talented Freddie Mercury, we wanted to break free,” Beyer told analysts last month after spending about $65 million to buy out the hedges.
Many miners say their shareholders invest in gold precisely because they want exposure to swings in the precious metal’s price, and that hedging damps this.
“We see investors do want exposure to gold…so the more unhedged we can keep that exposure, the better,” said Jake Klein , executive chair of Australian gold producer Evolution Mining.
Not all gold miners abstain from the practice. Australia’s Northern Star Resources, a $10 billion company, hedges about 20% of its production. It recently added some opportunistic hedges to take advantage of higher prices. New York-listed AngloGold Ashanti said it puts some hedges in place to help manage the risk of high costs at its Brazilian operations.
Evolution also has some hedges, designed to guarantee a return from the expansion of a gold operation in Western Australia. But it isn’t looking to add more, even if prices fall.
“Our view is that the best hedge to a gold-price decline is a low cost of production,” said Klein.
Gold prices are trading around record highs after climbing by about 20% since early October. Analysts say falls in Treasury yields and U.S. dollar weakness partly explain the rise. Both typically move in the opposite direction to prices of gold, which is dollar-denominated and pays no income.
They also cite ongoing geopolitical concerns, with gold viewed by some as a haven from volatility, and demand for bullion and jewelry in China. A recent rush by a number of central banks to buy gold has played an important role, too.
Miners are using that windfall to build and expand mines, and to acquire rivals. A number of companies have sought to invest in assets that also produce copper, an industrial metal that is considered essential to the energy transition.
Analysts widely expect gold prices to remain elevated this year at least, supported by expectations the Federal Reserve will begin cutting rates, improving the metal’s
Hedging is common among producers of commodities ranging from copper to natural gas
appeal.
Still, others question whether the rally can continue, as high prices might damp the appetite of central banks and others to buy more.
The next test of whether gold miners regain an appetite for hedging will happen when gold prices appear to trend lower, and executives fret about maintaining profitability, said John Reade, chief market strategist at the World Gold Council.
“Circumstances change, and so do shareholders,” Reade said.