Source: Zhitong Finance
High gold prices drive large-scale transactions and investment in new mines, and gold mining companies are in no hurry to use hedging to lock in prices to prevent the market from suddenly turning downward.
Although the price of gold has risen by about 20% since October last year, reaching a record high, high gold prices have boosted large-scale transactions and investment in new mines, and gold mining companies are in no hurry to lock in the price with hedging to prevent the market from suddenly turning downward.
According to our understanding, hedging is a practice that helps guarantee future output prices, and is very common among producers of various commodities, from copper to natural gas. However, the gold mining industry has always avoided hedging because during the previous bullish period for precious metals, the company was on the wrong side of the deal. For example, in 2009, the Canadian giant$Barrick Gold (GOLD.US)$The unprofitable hedge was bought out at a cost of more than $5 billion.
As a result, as spot gold prices hit a record high of around $2,195 per ounce on March 8, and increased interest rates made hedging more attractive than in the past decade, it became a question of whether large miners would change their strategies.
The answer, however, is that few miners do this. Tom Palmer, CEO of Newmont in Denver, said, “Our policy is very clear: we don't hedge against the price of gold.”
According to preliminary estimates from the World Gold Council, the comprehensive hedging book of gold miners grew by about 10% in 2023 as gold prices climbed to new highs. But the overall amount of hedging is still insignificant compared to the bets the industry has placed before. In the early 2000s, the gold mining industry reported a total of around 3,000 tons of hedging.
The attitude of gold miners towards hedging has been closely watched as this has an impact on global supply. Previously, when miners removed a large amount of hedging, it helped push the price of gold higher, but restarting hedging could have the opposite effect. Most recently agreed new hedging is mandatory by lenders to guarantee returns on new projects, usually lasting one or two years rather than ten years.
Many miners say their shareholders invest in gold precisely because they want exposure to fluctuations in precious metal prices, but hedging will curb this.
Jack Klein, executive chairman of Australian gold producer Evolution Mining, said: “We see that investors really want exposure to gold... so the more unhedged exposure we can keep, the better.”
Still, not all gold miners avoid hedging. Companies such as Australia's Northern Star Resources and AngloGold Ashanti still have some hedging. In addition, Evolution also has some hedging, which aims to guarantee the return of a gold mine expansion project in Western Australia. But even when the price of gold falls, it does not seek additional hedging.
“Our view is that the best hedge against falling gold prices is lower production costs,” Klein said.
The price of gold has risen by about 20% since October last year, reaching a record high. Market analysts said that the rise was partly explained by falling US Treasury yields and a weaker dollar. The two are generally the opposite of the trend of gold prices because gold is denominated in dollars and does not generate revenue.
At the same time, they also mentioned continuing geopolitical concerns. Some people see gold as a safe haven for fluctuations, as well as China's demand for gold bars and jewellery. Recently, some central banks have also played an important role in buying gold.
Currently, miners are using this windfall to build and expand mines and acquire competitors. Many companies seek to invest in assets that also produce copper, an industrial metal considered critical to the energy transition.
Analysts generally expect that, supported by expectations that the Federal Reserve will begin cutting interest rates, the price of gold will remain high at least this year, thereby increasing the metal's appeal. Others, however, question whether the rally will continue, as higher prices may dampen interest from central banks and other buyers in buying more.
John Reed, chief market strategist at the World Gold Council, said that the next time to test whether gold miners have regained hedging demand will occur when gold prices show a downward trend and executives worry about how to maintain profitability.
“The situation is changing, and so are shareholders,” Reed said.