LONDON (MINEWEB) -
Hedging has come soaring back into the headlines in recent weeks as a result of a number of fairly high profile comments. And, while the global gold hedge book is still massively lower than where it once was, in recent months there has been a growing trend among lenders to ensure that part of the gold output is hedged forward as a prerequisite for raising new finance.
Before the seemingly ever rising gold price of the first decade of the 21st Century put hedging out of favour, and the big miners scrambled to dehedge, this was, in fact, pretty normal practice. Gold mining was looked upon as a particularly risky business after the big collapse down from $800 in 1980 to under $300 over the subsequent 20 years and the banks were thus keen to protect their investment which they could do by an insistence on hedging output at a specific price as an income guarantee. But now, some are suggesting there is a hidden agenda behind a new insistence on hedging by the bullion banks.
It certainly won’t have gone without notice that gold bullion is flowing out of U.S. and European vaults to the east – and to China in particular. Indeed, despite the massive gold liquidations out of the big ETFs – GLD in particular – and more, available metal in COMEX warehouses is at a very low level as most of it is being swallowed up by Eastern, Middle Eastern and FSU demand. Add into this the certainty that many central banks have been leasing out much of their gold, which has then been sold on by the bullion banks, and there is a huge supply squeeze developing for physical gold in the West.
The bullion banks will supposedly have to return the gold they have leased, but are unable to do so because the available bullion supplies are just not there and that which comes on the market is being snapped up by the East. Indeed this desperation to get their hands on physical metal without bankrupting themselves may be at least a partial reason for the gold price being driven downwards with the kind of strange market activity we have seen in the recent past. Their inability to return leased gold to the central banks is also the most likely reason why Germany is finding it so difficult to repatriate its gold stored in U.S. and U.K. central bank gold vaults.
Thus, the reports suggest, the bullion banks are now exerting pressure on the basic gold suppliers - the miners - to supply gold directly to them (through hedging) to try and help replenish their holdings so as to be able to return the gold they have leased. The suggestion is that should a gold miner require say $300 million in finance to build a new mine, or expand an existing one, it is going to be required to hedge a significant portion of its production in order to get the financing. But the miners are resisting this – at a gold price of around $1200, most would be mining gold at a loss. The miners’ main hope is for an increase in the gold price in the future as new operations and expansions come on stream, but if they hedge their output forward at $1200 they would be doing so at, or near, a lossmaking level – not an attractive proposition, and one which could land them in serious financial difficulties should the gold price take off again and, as we have seen in recent years, costs escalate accordingly.
But there is another side to the new mined gold supply situation that could be even more worrying for the bullion banks in terms of reducing new mined gold supply availability in the West. We hear that gold miners are being approached to sell their output direct to Chinese refiners at a premium – surely an attractive proposition for a struggling gold miner. The idea of selling output direct to the Chinese is not new. Coeur’s Kensington gold mine in Alaska currently sells around half of its output of gold concentrates directly to China National Gold Group Corp. under a deal set up about four years ago. However the recent reported moves by the Chinese to secure gold output from the mines directly would almost certainly be welcomed by today’s struggling gold producers, and would probably offer far better potential returns should the gold price recover than bullion bank imposed hedging.
It does look as if we may be heading for something of a serious squeeze on supplies of gold bullion in the West if the massive Chinese, and other Eastern demand continues at anything near current levels. A report highlighted yesterday notes that China’s current President, Xi Jinping, has stated that the Chinese dream is the pursuit of gold with the aspiration to seek ‘peaceful development in the world’. This appears to suggest a desire by the Chinese to work towards some kind of new currency standard within which gold plays a major role and is perhaps behind the huge accumulation of physical gold by the Chinese who see it as key to the future of the global economy and the country’s place in driving it forwards.
