Gold hedging falls further out of vogue

The world’s top 84 gold producers cut their collective hedging positions in fourth-quarter 2002 by 4.9 million ounces, in response to a rising gold price and an increased appetite for pure gold exposure, according to a hedging survey released this week by London-based Virtual Metals Research and Toronto-based Haliburton Mineral Services.

“We are perhaps witnessing a seismic shift in the nature of gold mining companies, which in the last decade have come to be associated with sophisticated financial engineering, deploying derivatives to protect themselves against seriously and successively weak gold prices,” said Jessica Cross, chief executive of Virtual Metals.

Cross said the recent bull run in gold has helped clarify the strategies of gold producers. “Concurrent with the recent dollar price strength of gold, gold mining companies have been unwinding their hedge books. This in turn has helped convince Western-based investors that the bull run may be more than a flash in the pan,” Cross said.

According to the hedging survey, the international gold hedge book, which tracks the hedging activities of 84 gold producers - accounting for 66% of global output - now stands at a total of 80.9 million ounces. The total fall in 2002 was 14.8 million ounces, or 459 tonnes.

The report attributed the fall in hedging to a decline in call option positions and a reduction in net forward positions. The recent strong climb in the gold price and low interest rates have considerably weakened the propensity of gold producers to lock in prices through hedging.