Big Q1 drop in gold hedge book, but end of dehedging in sight

The quarterly Fortis Hedging and Financial Gold report says the first quarter of 2008 saw a “huge” drop in gold hedging, but the market support from producer buybacks is coming to a close.

JOHANNESBURG - 

Global gold hedging saw the largest decline in percentage terms on record in the first quarter of 2008 as an 18% or 4.8m ounces reduction brought the global gold book down to 22m ounces. But the Fortis Hedging and Financial Gold Report says dehedging volumes will significantly decline in 2009 and beyond.

The quarterly report issued by the VM Group said AngloGold Ashanti, Barrick, Buenaventura and Newcrest reduced their hedge books with a total of 4m ounces in the quarter. AngloGold Ashanti reduced its hedge book with 1.2m ounces, Barrick converted 1.1m ounces of fixed-rate contracts to floating-rate contracts, Buenaventura closed out its entire hedge book of 0.9m ounces and Newcrest cut its hedge book by 0.7m ounces to 0.2m ounces.

The balance of the reduction in the global hedge book came from 32 different companies making reductions in their hedge books.

The first quarter of 2008 also saw the lowest total new hedging since the second quarter of 2002, at 7,137 ounces.

The VM Group has increased its forecast for hedging in 2008 to 10-12m ounces on the back of AngloGold Ashanti's announcement that it will close another 3.8m ounces of hedging this year.

"This means the global book will be only 15-17m ounces at the end of the year. The support the market has had from producer buybacks is coming to a close, volumes are likely to significantly decline in 2009 and beyond."

The mark-to-market valuation of the global book improved slightly in first quarter 2008 at an estimated negative $11.2bn, $0.1bn "better" compared to end of fourth quarter 2007, said the report. The improvement was small despite the large reduction in hedging, due to the $97/ounce increase in the gold price in the quarter.

Exchange-traded funds suffered its worst month on record for outflows in April. The StreetTRACKs product fell by 62.5 tonnes, but has made a slight recovery since.

However, official gold sales have slowed as Central Bank Gold Agreement signatories battle to reach their 500 tonne maximum sales limit.

"Unless a central bank resumes sales, it is likely that they will collectively undershoot the limit by more than 100 tonnes."

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