FRESNILLO's Herradura mine in Mexico, part of its Penmont portfolio.

FRESNILLO's Herradura mine in Mexico, part of its Penmont portfolio.

Hedging Chitchat Sounds Bullish Note for Gold

Issue 116, February 2015

Continued from Page 1 

...over a longer period, hedging is also a valuable contrarian indicator.

Contrarian Indicator

Just as the costly unwinding of hedges in 2009 and 2010 signalled the saturation of bull market thinking and the nearing of a price peak, so a more widespread return to hedging would show that investors, directors and the market have been ground down by falling prices, relenting on expectations of an imminent recovery.

Ultra-low interest rates are thought to have slowed any faster move to hedging, lowering the incentive to bring cash forward, though the greatest obstacle is undoubtedly the stigma attached to forward sales, with critics likening the concept to a cargo vessel unloading at sea, so as to reach its destination quicker. “Hedging is for gardeners,” one fund manager has told Reuters.

Tellingly, hedging deals have been most popular amongst Australian miners, remaining absent from the US, arguably reflecting a stronger mining culture and less gold fanaticism.

Oil Hedges

Oil hedges have meanwhile highlighted the risks attached to hedging for companies trying time or mitigate the market. “It's a nice win,” Iamgold's chief executive Steve Letwin said of oil price falls in December, shortly before the company announced that it had in fact bought derivatives to hedge the bulk of its oil consumption at $68 to $95 per barrel for the next 3 years, prompting a $50m impairment.

Barrick Gold, which famously maintained its gold hedging book through much of the last bull market, raising $3bn to close it out shortly before prices peaked, has also hedged half of its oil consumption for 2015 at $91 per barrel.

West Texas crude traded Thursday at $49.94.

“Hedging is for gardeners.”

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