Gold Dehedging Decelerates


"At the end of 2008, the outstanding delta-adjusted hedge book stood. . .483 tonnes, a fall of. . .358 tonnes against year-ago levels."

The latest Société Générale global gold mine hedge book, compiled independently for the bank by GFMS Ltd., records that net producer de-hedging has continued to decelerate. Dehedging in the fourth quarter was at the slowest rate in the year and as the rate of dehedging fell away in each successive quarter of the year. The rate had picked up in the first quarter of 2008 to the highest since the second quarter of 2007, and completes three years of relatively strong dehedging activity. At the end of 2008, the outstanding delta-adjusted hedge book stood at 15.5 million ounces or 483 tonnes, a fall of 11.5 million ounces or 358 tonnes against year-ago levels, the third consecutive year of strong de-hedging.

Net hedging was first recorded in the market in 1984, when there was net accelerated supply of 13 tonnes and after increasing for 16 years, the global hedge book peaked at 3,064 tonnes in 2000. It has subsequently contracted by 84% in just over eight years.

This study notes that the existing delivery profile calls for a 60-tonne reduction in the global hedge book in 2009, with approximately 70 tpa thereafter through to the end of 2012, which would leave the outstanding book, assuming all other conditions were equal, at a delta-adjusted 221 tonnes.

The nominal hedge book stood at 605 tonnes at the end of 2008, of which outstanding gold options comprised 272 tonnes or 45% of the total number of contracts constituting the book. The delta-adjusted options book stood at 4.82 million ounces or 150 tonnes and the study contains its usual matrix of sensitivity of the fourth-quarter options book as at the end of the past quarter.

Fresh hedging potential still has a couple of constraints to address. The first is the established investor-aversion to hedging, which will continue to be an important feature in companies' risk management decisions; and the second is that current market conditions are less favorable for hedging now than, for example, 12 months ago and a flattening of the forward curve has vastly considerably diminished the incentive to hedge. Gross hedging in 2009 is, therefore, expected to be limited.

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