By Sreekumar Raghavan
Many factors influence the price movements in gold- inflationary trends, the dollar, oil, equity markets and conditions of the global economy. However, nobody can precisely say what way Gold will go in the next six months or a year although many analysts do put up forecasts which are lapped up the media as fast as it is released.
There is one set of data—producers' hedging and de-hedging data for gold which is also watched with keen interest. Producers take a hedge in order to protect themselves from possible downward movements. But eventually after taking a hedge, if producers think that prices are going to move upwards they might opt for de-hedging, the process of closing out positions that were originally put in place to act as a hedge in one’s portfolio.
In simple terms, we can say that if producer hedging increases in a particular period of time that perhaps signals that they expect prices to fall in the medium to long term horizon. In the middle of a hedge-period if they start de-hedging, it means they expect prices to go up or the market to turn bullish. Although, in real life things are not so simple!
The latest data released by GFMS,Brade and Societe Generale: Global Hedge Book Analysis Q1,2009 points out that fact that in Q1 2009, producer-dehedging was most neutral although the consultancies did forecast a marked fall for 2009 earlier. Producer de-hedging recorded was a meagre 0.11 Moz (3 t), at less than 1% the most neutral result since the third quarter of 2003. This minor cut left the global producer hedge book at end-March, in delta-adjusted terms, at 15.68 Moz (488 t). In nominal terms the global book fell from 19.73 Moz (614 t) to 19.22 Moz (598 t), with the net reduction attributable to cuts made to the options portion of the book.
GFMS notes that Q1 2009 was the weakest in recent quarters when it comes to gold-dehedging. Apart from a significant buy-back undertaken by Anglo Gold Ashanti which restructured the portfolio further majority of others were closed on normal expiry or delivery into contracts.
Low level of de-hedging was countered by hedges tied to two project finance agreements finalized during the quarter, by Catalpa Resources and Apollo Gold, GFMS notes. De-hedging is expected to fall further in 2009.
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Gold de-hedging and bull run
A declining interest in de-hedging on the part of miners could signify many things. As GFMS has stated gold price volatility could be lesser than last year and it does not suggest that miners have changed their attitudes towards hedging and de-hedging.
Two major players in the hedge book are Barrick Gold and Anglo Gold Ashanti who control the majority of the volumes. With Anglo Gold still holding to bullish view on the metal, they may remove their hedge cover at an accelerated rate which may not be the case with Barrick Gold which is using hedge for its restructuring activities.
As in the case of Catalpa Resources and Apollo Gold, miners do not consider hedge just as an insurance to counter price volatilities which makes the analysis of de-hedging data a bit more complex. The marked-to-market liability of the producer book remained broadly stable at negative $5.8 billion.
This still leaves the question unanswered as to how far falling dehedging suggests a bearish view of miners about future gold prices and how far bullish forecast by analyst not taking into account de-hedging data could turn out to be true. As regards other factors it is still unclear how far expectations of economic recovery or inflationary expectations will add to bullishness that makes present popular ofrecasts still more suspect.
