Commodity Online
NEW YORK: Is hedging in Gold coming down? Yes, says the latest VM Fortis Hedging and Financial Report.

The report contains a mixed bag of news on several fronts. The good news is that hedging fell through the floor in Q1 and that central bank sales show signs of coming in under target once again.

The worrisome news is that hedging is anticipated to grow quite soon and that the ETFs have lost a sizeable amount of gold during the latest correction. Here are the highlights of the report:

"Global gold hedging saw the largest decline in percentage terms on record in the first quarter of 2008 as an 18% or 4.8m ounces reduction brought the global gold book down to 22m ounces. But the Fortis Hedging and Financial Gold Report says dehedging volumes will significantly decline in 2009 and beyond.

The quarterly report issued by the VM Group said AngloGold Ashanti, Barrick, Buenaventura and Newcrest reduced their hedge books with a total of 4m ounces in the quarter. AngloGold Ashanti reduced its hedge book with 1.2m ounces, Barrick converted 1.1m ounces of fixed-rate contracts to floating-rate contracts, Buenaventura closed out its entire hedge book of 0.9m ounces and Newcrest cut its hedge book by 0.7m ounces to 0.2m ounces.

The balance of the reduction in the global hedge book came from 32 different companies making reductions in their hedge books. The first quarter of 2008 also saw the lowest total new hedging since the second quarter of 2002, at 7,137 ounces.

The VM Group has increased its forecast for hedging in 2008 to 10-12m ounces on the back of AngloGold Ashanti's announcement that it will close another 3.8m ounces of hedging this year.

"This means the global book will be only 15-17m ounces at the end of the year. The support the market has had from producer buybacks is coming to a close, volumes are likely to significantly decline in 2009 and beyond."

The mark-to-market valuation of the global book improved slightly in first quarter 2008 at an estimated negative $11.2bn, $0.1bn "better" compared to end of fourth quarter 2007, said the report. The improvement was small despite the large reduction in hedging, due to the $97/ounce increase in the gold price in the quarter.

Exchange-traded funds suffered its worst month on record for outflows in April. The StreetTRACKs product fell by 62.5 tonnes, but has made a slight recovery since.

However, official gold sales have slowed as Central Bank Gold Agreement signatories battle to reach their 500 tonne maximum sales limit.

"Unless a central bank resumes sales, it is likely that they will collectively undershoot the limit by more than 100 tonnes."

As promised, more on the topic of the connect/disconnect between gold and oil. Allen Sykora from DowJones Newswires bring us up to date (Warning! I am quoted in the story, thus certain tinfoil clubs may wish to avert their eyes):

"Record-high crude oil prices and the dollar's attempts to escape its oversold status are spawning mixed analysis about some of the traditional trading correlations. Some analysts said the traditional correlation between gold and oil could mean further gains for the metal; others said the link isn't automatic and gold instead could focus more on signs that the dollar may have put in a bottom."

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