Despite gold hedge book contracting in Q3, full-year growth expected

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TORONTO (miningweekly.com) – A new report released on Tuesday by Societe Generale and Thompson Reuters GFMS had found that net gold hedging had declined by a net 200 000 oz in the third quarter.

This was the result of a slowdown in the volume of hedging, which meant that the delivery into and the maturity of pre-existing positions outweighed new positions.
This left the global hedge book at 4.76-million ounces of gold at end-September, a net addition of 1.84-million ounces since the start of the year. Thirteen companies added to their hedge positions during the quarter, while 24 companies’ hedge positions fell quarter-on-quarter.
Thomson Reuters GFMS senior analyst for precious metals Matthew Piggott said that the third quarter slowdown was a “return to trend” for producer hedging activity after an eventful second quarter.
“There is not yet compelling evidence from the market to indicate an extended rise in the volume of hedging by gold miners however. While we may see some isolated instances of companies entering into positions, we maintain our view that conditions in the market are not yet aligned for a return to producer hedging en masse,” he said in a statement.
The report noted that the gold market received somewhat of a shock when, in the space of five trading days, gold fell from $1 223.50/oz on October 29, to a four-year low of $1 142/oz on November 5, a 7% decline.
The gold price falling to multi-year lows in early November provided a warning to gold miners for potential downside to gold. With many producers having to cut exploration and capital expenditure sharply at prices above the psychologically important $1 200/oz level (the current average all-in cost of production), it could be argued that there was already compelling reason for parts of the industry to look to hedging to preserve already thin margins, the report said.
“We would argue that the industry is in a fundamentally unhealthy state, and for many operators at the higher end of the cost curve, a long-term hedging programme at current prices would secure margins which would not facilitate a renewal of capital expenditure for new mine development and exploration. At current prices, we therefore think that the conditions are not yet conducive to a widespread return to the practice of hedging,” the report’s authors argued.
The fourth quarter had already seen companies announcing new hedging, including OceanaGold, Northern Star Resources and Norton Gold Fields.
For the full year, the companies forecast net hedging in a range of between 1.35-million ounces to 1.68-million ounces.