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Friday, April 29, 2005

Gold Hedging

Gold Hedging is when a gold producer contractually locks in a gold price to be paid in the future when their gold is produced, regardless of whether the gold price in the future is higher or lower than the agreed upon contractual gold price.

The original reason gold mines used gold hedging was to protect a portion of their cash flow in the event that the gold price dropped without warning. This way they could still pay their operating expenses.

Gold mines use to hedge 10% of their annual gold production however, in recent times some major gold mines have hedged as much as 300% of their annual gold production. Which is a very large bet that the price of gold is going to go down! If that bet turns out to be wrong and there is a rapid spike in the gold price they could actually go bankrupt!

It seems many of the large gold mining companies are rapidly changing their bets by moving from Gold Hedging to Gold De-Hedging as they prepare for what lies ahead in this gold bull market.

GFMS who claim to be the world's foremost precious metals consultancy, specialising in research into the global gold markets, has released its annual review called Gold Survey 2005.

GFMS says gold hedging slumped to a 10 year low of 1,779 tonnes in 2004. Although the rate of gold de-hedging would slow in 2005, the trend would continue to support gold price surges above $454/oz, GFMS said.

Commenting on future gold hedging trends, GFMS said that in 2005 a further 280 to 300 tonnes of gold would be de-hedged either by buying back positions or non renewal of gold hedging contracts. “There was an estimated 532 tonnes of de-hedging versus 90 tonnes of new gold hedging,” GFMS said.

“While this figure suggests that the peak in gold de-hedging has already passed, at around 300 tonnes, gold de-hedging should continue to provide an important support for the gold price this year, especially on dips where buy backs could soak up lost gold demand during periods of weaker investor interest,” GFMS said.

The following large gold companies have been rapidly de-hedging in 2005:

AngloGold Ashanti has reduced gold hedging by 23%
Australia’s Sons of Gwalia has reduced gold hedging by 12%
Barrick Gold has reduced gold hedging by 12%
Placer Dome has reduced gold hedging by 10%
Newcrest has reduced gold hedging by 8%

It is wise to avoid mega gold hedging companies like Barrick Gold like the plague when selecting gold stocks in a gold bull market.

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