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Gold Miners Should Hedge

Topics [ gold prices gold ]


A significant factor weighing down on gold prices in the 1990s was the increasing amount of hedging by gold miners. It is thus with concern that Paul Walker of GFMS is reported as calling for miners to consider hedging again, based on his view that one has “to countenance that there’s a materially positive probability that the gold price, some time in the next few years, could fall catastrophically and stay low for a long, long time.”

The global miner hedge book began its decline in the third quarter of 2001 from 103 million ounces to 5 million ounces today, an average effective buy back of 76 tonnes per quarter over that period. The chart below demonstrates the effect of the hedge book on the gold price.

Delta adjusted global miner hedge book: The hedge book weighed down on the gold price during the 1990s whereas its reduction since 2001 has provided support.

Paul notes that “if gold producers resumed hedging, it would send a clear signal to the market that they considered it to be at or near a peak, but management had to begin sensible talks with investors to begin formulating a way to begin locking in value” otherwise he thought it would be “a dereliction of duty to your shareholders and the country you’re based in.” My view is he is ignoring the dramatically negative impact that “clear signal” would send and which could arguably initiate a decline. The subsequent rush by miners to lock in hedges would result in a negative feedback loop, to their own detriment.

Paul obviously feels that it will be sooner rather than later “when the interest-rate cycle turns and we see a big structural shift in the gold market. When that happens, the guys who put positions in place will come out smelling like roses." And if he is wrong about how deep the world’s economic problems are and how long debt deleveraging will take, then I’d suggest the guys (and gals) who put such positions in place will come out smelling like something else.

Download today’s full Blog Watch (pdf 355kb) for more reviews, including:


In an interveiw with Financial Sense, Dr. Marc Faber says that for investors with a diversified portfolio it's disirable that gold doesn't perform well!


The World Gold Council (WGC) has just released an update on central bank sales under the third Central Bank Gold Agreement, which limits sales of gold by the central banks involved.

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