Gold hedging slows but gold ETFs have grown more so far in 2009 than in whole of 2008

VM group report shows global gold hedging in Q4 08 fell 1.5 Moz (45t) to 15.5 Moz (483t). ETF offtake at 10.3 Moz (321t) in 2009 already higher than in all of 2008.

LONDON - 

Along with the GFMS analyses and those from CPM, the gold market always studies the VM Group's reports, issued on behalf of Fortis Bank, with special interest and the latest of these turns up some interesting data on dehedging, official gold sales and ETF holdings.  The summary of the report is noted below. 

DEHEDGING

In its report, VM Group records that global gold dehedging slowed in Q4 08, with outstanding hedge positions falling 1.5 Moz (45t), the smallest decline since Q4 06. Measured in committed ounces the decline was a smaller 1.1 Moz (34t).

Thirty-two of the thirty-seven companies with hedge positions cut them, led by AngloGold Ashanti, which reduced its hedge commitments by 0.3 Moz (9.3t), followed by Kinross, which cut by 0.26 Moz (8.2t). Only two companies made additions to their book, both minor.

Despite the final quarter slowdown full year 2008 dehedging was 11.3 Moz (352t), a reduction of 42% and the fifth year in six that dehedging has been more than 11 Moz. The global hedge book now stands at just 15.5 Moz (483t), down from a peak of 102.8 Moz (3,198t).

The reduction in hedging has reduced the mark-to-market valuation of the global gold hedge book to a negative $6.7bn, 10% and $0.7bn better than a revised negative $7.5bn at the end of Q3 08. A year ago it was negative $11.3bn. However, at a gold price of $1,000/oz the valuation would worsen to a negative $8.7bn.

Looking ahead, in the last three years the first half of each year has seen rapid dehedging. The reduced size of the global book makes this unlikely in 2009, however, and the VM group forecasts a  quarterly decline of just over 1 Moz per quarter over the year. 

ETF FLOWS

Flows into the 15 gold ETFs have broken all records in 2009 so far, with 321t (10.3 Moz) up to 25^th February, slightly more than in all of 2008 (which itself was an annual record). February alone has seen record inflows (for a month) of 216t (6.9 Moz) up to the 25th. Total holdings are now an estimated 1,516t (48.7 Moz).

Until February, flows into ETFs outside the US, such as those in Europe, had been gaining ground against the US ETFs, in particular the market-leading SPDR ETF, perhaps reflecting record gold prices in many currencies including euros. Furthermore, even inflows into the SPDR ETF, which picked up again in February, seem more correlated with the euro gold price than dollar gold price.

OFFICIAL SALES

Net official sector sales slumped to 5t (0.2 Moz) in Q4 08 as weak sales were offset by some additions (most notably by Russia). Sales by the Central Bank Gold Agreement signatories - who account for the  vast majority of sales - have so far in Q1 09 been only an estimated 24t (0.8 Moz), although 17t (0.5 Moz) of that has come in the last two weeks. Globally sales are likely to continue at low levels until - if - the IMF gets the go-ahead to sell.

Matthew Turner, VM Group's author of the report, said: "Dehedging has been highly supportive of gold prices over the past six years but is now providing a more modest impact. At present however this slowdown is more than being offset by reduced central bank sales and most importantly the rapid accumulation of gold by the exchange traded funds."

COMMENT

The VM Group analysis deals with specific supply/demand factors - primarily those which, in concert, have been very supportive of the gold price since the beginning of the year, and which drove it to touch U$1,000 last Friday.  $1,000 seems to be a dangerous level for gold though, as it has not yet managed a prolonged breakthrough from this psychological level.  It is noticeable that the big SPDR Gold Trust ETF, which had been making new records every day as its holdings increased appears to have flattened as investors pause for breath, perhaps sobered by the contemplation of the four figure dollar gold price.  The dollar itself has been stronger which has meant gold has taken a breather and fallen back as a result.  The stock market appears to have improved and there is some speculation that a gold price bubble may be about to burst.

But, the general economy is not stabilising, or improving - indeed it will almost certainly get worse before it gets better and another sharp drop in the Dow or the FTSE should see gold pick up yet again.  We're certainly not out of the wood yet and with deflation (if indeed this technically on the cards) will ultimately be replaced with inflation, as government interventions are nothing if not highly inflationary in the longer term, and gold normally does well in inflationary periods.

It also looks like Asian gold purchases may be beginning to pick up again on the recent gold price fall and buying on dips in the price could still be good policy.  No, one cannot guarantee that the gold price will not collapse, but the economic situation does suggest that its bull run may not be over yet and at some stage it seems more likely than not that the $1,000 barrier will be breached significantly in the short to medium term..

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