With the gold price trading near new records, and coincident with the unwinding of the last really big gold hedge position by a major (AngloGold Ashanti) the question could be asked – has the dehedging spree been overdone and should gold miners perhaps be hedging again – at least with regard to a small part of their output to lock in some profits at current price levels?
This question was raised by Graham Birch, formerly the fund manager at the world’s biggest gold mining fund, Blackrock Gold & General, speaking at the luncheon at the recent RBCCM Gold Day in London. The idea posed was particularly significant as Birch and his colleagues – the late Julian Baring and the current fund manager Evy Hambro, were extremely vocal in the past in decrying gold miners’ hedging policies – but he feels the situation may now have changed.
His main argument against gold hedging had been that the gold companies hedged at the wrong time – when gold prices were low. The time to hedge is when gold prices are near their peak. However, Birch was not necessarily predicting a top to the gold market at the current price level, but was pointing out that most major gold miners are now making very good operating profits at the current gold price level and there is thus a good case for limited hedging programmes to lock in some of these profits in the short to medium term.
As for the gold price itself, the drivers which have been taking gold to record levels are still virtually all in place. Most analysts do expect corrections – possibly heavy ones – to occur from time to time as witness the reduction of around $60 from peak to trough in a 30 hour period from Thursday morning in London. The downturn may not be ended yet, but the suspicion is that it is just a blip in an ongoing upwards trend which could see the gold price in the mid $1400s – or even higher – by the year end. The gold market is certainly not predictable though and there is some bearish sentiment out there, but the key seems to be that the really big gold holders are not yet selling due to ever-continuing worries about the state of the global economy and a sneaking suspicion that the general stock markets are due a major correction following a few months of continuing gains. Gold is still seen as a safe haven by those with substantial assets to protect.
As for hedging though, what Birch said certainly seems to makes sense. Hedging a proportion of production to protect profits is a far cry from the old hedging policy of hedging to mitigate losses from low gold prices. The old hedges ultimately proved to be major constraints on profits and actually led to the complete downfall of some prominent gold miners whose only way out was to be absorbed into companies with deeper pockets. However a hedging policy which only covers a proportion of production and is undertaken on a relatively short term basis, can provide good insurance for a company’s shareholders, as long as it is undertaken at levels which will continue to make profits for the company regardless of the direction of the gold price.
The age of hedging is certainly not over for some junior and mid-tier miners anyway who are forced into forward sales as part of the securing of finance for project development. It is not only the miners who may seek protection from locking in prices at a certain level, but also the lenders.
Hedging, for gold companies in particular, has been seen as a negative policy with all the impetus of late being in dehedging, but perhaps it should not be regarded as such. Gold mining companies now use the fact that they are fully unhedged as a positive selling point. But, after all the reason gold has had such a good run has been because of investors themselves using gold as a hedge against future inflation and a possible market crash. Perhaps it is now time for miners to reconsider their hedging policies too.