In a final note on their latest commodities research on gold, Goldman Sachs analysts, Jeffrey Currie and Damien Courvalin suggest that gold miners should hedge their output and lock in 2013 prices and beyond, given the investment bank’s medium term forecast of gold falling further to $1,050 an ounce. But maybe producers should be wary about hedging at current levels and may recall the Goldman inspired hedging activity by Ashanti Goldfields back in 1999 which led to the miner’s demise and it being swallowed up subsequently by AngloGold when the gold price moved against it. (As Wikipedia puts it: In 1999, the company [Ashanti] succumbed to an ill-executed gold price hedge led by Goldman Sachs, which drove it to the brink of bankruptcy). Thus Goldman Sachs is not always right, although as we’ve mentioned before sometimes its analyses and subsequent recommendations move the market on their own, such is the aura surrounding the bank’s activities and advice.
And it’s not as if Goldman’s advice can’t change fairly rapidly. Mineweb readers may recall that only six weeks ago the bank was saying that it expected the gold price to average $1,413 an ounce this year although, to be fair it was, even then, predicting the fall to $1,050 next. It felt that the likelihood of the Fed cutting back its stimulus sharply had diminished. Now the bank’s analysts just say they are ‘neutral’ on gold prices for the rest of the year with it ending at around $1,300 an ounce – or around the level it is at the moment.
Currently gold traders are nervous ahead of any pronouncement from the FOMC’s current meeting on tapering due today. If, as expected, the Fed does propose a small taper, then markets may breathe a sigh of relief (not only in gold but the stock market in general). Just as the Quantitative Easing programme had led to sharp increases in gold, it had also fuelled the flames of growth in the S&P and Dow and fears of a sharp downturn here, which would have a very adverse effect on perceptions of overall economic growth, is probably the prime cause of any tapering likely to be gradual, rather than severe. The Fed’s problem is that the market growth it has created through its economic policy needs to be let down very slowly, as any seriously adverse reaction to its proposal in the general markets may mean it will have to ‘untaper’ again very rapidly and restore the current status quo on bond buying, or even perhaps increase it. Ben Bernanke and his colleagues are having to tread a very careful path. They will have to wind down QE sometime though – even if the employment targets they have set are not met – and it doesn’t look like they will be – at least for some time to come.
So although Goldman Sachs suggests producers should hedge gold production, presumably there is no rush to do so given its current forecasts and perhaps before doing so the gold miners will have time to see what reaction there is to whatever the FOMC meeting proposes with regard to its likely tapering programme later today. If it suggests sharper tapering than expected then there is definitely a downside risk to the gold price. A mild tapering programme as is expected may see a small movement in price either way, while any delay in tapering implementation could give the gold price, and the stock market, a boost.
Where one cannot argue with the Goldman pricing analysis is that some of the buying momentum appears to have gone out of the gold market. While Chinese buying remains high – but we could see perhaps a sharp fall in August when that month’s figures are released from Hong Kong – official figures will also suggest that Indian demand is falling fast. The Indian market seems to be more price sensitive than the Chinese one and with the rupee dropping like a stone, coupled with high premiums because of the government’s 10% gold import tax, the Indian gold buyers appear to be taking a bit of a breather, although no-one knows, of course, the extent of gold smuggling as a result of the import taxes. This is likely high, but not sufficiently so to counter the fall-off due to the government controls.
Asia as a whole is probably still buying more gold than a year ago, and gold outflows from the ETFs in the West have fallen sharply – indeed the GLD holding is up off its recent low point, but only just so. Gold and silver prices this morning are weak ahead of the FOMC decision, gold barely holding above the $1,300 level at the time of writing.
So, to hedge or not to hedge? That is the question facing some gold producers. Those looking for finance may be forced to anyway by their prospective lenders – we have already seen some cases of this, but so far this has been fairly limited. For the time being perhaps the big guns among the gold miners look likely to hold off, but smaller and mid scale miners may well do so, while those with prospective costs at or around the $1,300 level may already have left such a decision too late. Perhaps they should have hedged when gold was hitting its 2012 heights, but now they may have missed the boat and if Goldman is right in its $1,050 prediction for next year those that have been just hanging on will surely have to call it a day – until the next gold price upsurge.
iPad Version: Picture – An employee arranges gold jewellery in the counter as her arm is reflected in the mirror at a gold shop in Wuhan: REUTERS/Stringer China