By Madhurima R S
MUMBAI: Does the behavior of gold producers in forward markets offer any clue on the future prices of the precious yellow metal?
According to Quantum Gold Fund, gold producers are reducing their futures commitments significantly. The are reducing the quantity of gold they sell in forward/futures market at a fixed price.
“Gold producers are "de-hedging" . This in simple terms means that they are squaring off their outstanding forward sale positions. i.e. They are buying back gold , which they have sold earlier in the futures market,” Quantum Gold Fund in a communiqué to investors said.
Earlier, gold producers sold most of their future production in the forward. It enabled them to lock-in their profit margins and decide on the quantum of gold they would produce and release into the market in the future.
According to metal experts, the de-hedging process is indicative of the gold producers’ expectation on the future trends in gold prices. If gold producers expected the price of gold to go down in the future, they would have tried to lock-in their future production at the prevailing higher rates. Obviously, by not doing so, since they expect gold prices to go up in the future!, Quantum Gold Fund said.
According to analysts, it is interesting to note that from 2005 to 2007, a majority of the de-hedging activity by gold producers was concentrated in the first half of the year. This could be because the second half of the year saw the maximum surge in prices during most of these years. In previous years, gold producers lost heavily as they locked into lower futures prices in the beginning of the year.
“We saw increased de-hedging activity during the first half of this year. We also saw record high prices during the same period. This implies that producers squared off their forward sale positions, and incurred losses even at higher price levels. This indicates that they expect gold prices to increase much beyond the record highs seen recently”
According to Quantum Fund, the gold producers are in the best position to understand future supply trends. They are aware that it is extremely difficult to find new gold deposits. To extract good quality gold ore, they have to dig deeper in their existing mines. That apart, they are also affected by rise in the cost of production of gold, due to increase in labour costs, exploration costs, power costs, mine rehabilitation costs, etc. In such a scenario, one can only expect gold prices to move upwards over the longer term, Quantum Gold Fund said.
Gold producers know better than others the pulse of the gold market. They have witnessed the huge gold price rise in 1980 which saw gold reaching new highs. They have also borne the impact of the precious yellow metal getting beaten down, on account of intervention by the central banks of various countries, towards the end of the last decade. Therefore, watchout for the hedging-de-hedging activities of gold producers to get a clue in to the future of gold prices.!
