Trimming the hedges
Gold is a little too close for comfort to the bearish forecasts of $US1000 an ounce. Normally if supply were tight, the relevant item would see some price support. Not so in gold’s case, which is further evidence (if it were needed) that the yellow metal is something separate from your average commodity. The latest quarterly from the World Gold Council shows a 3 per cent decrease in mined output. While some mines have lifted output this has been more than offset by others levelling out and more mature mines producing less gold.
More important, gold companies have been trimming their budgets, and that includes exploration. This, as the WGC notes, will have its supply consequences down the track. Moreover, the scope for further cost cutting is diminishing; sustaining capital spending has been slashed by nearly a third across the industry over the past two years, leaving little room for further cuts.
You would think that, with the gold price looking shaky, companies would be rushing to hedge. The WGC says there was only 20 tonnes of net hedging in the September quarter. Most of this was caused by two Australian companies, Evolution Mining (EVN) and Metals X (MLX), forward selling nine tonnes and eight tonnes respectively, taking advantage of the fall of the Aussie dollar (sending gold in the local money to more than $1500/oz) and locking in secure cashflow.
Generally, though, the council sees little move to hedging as locking in prices is still unpopular with shareholders — which suggest that those investors don’t buy the gold-is-finished story.
MLX Price at posting:
$1.13 Sentiment: Buy Disclosure: Held
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