Fresnillo, Polyus Gold Drove 2014 Growth in Gold Hedging

Reuters reported that in 2014, the volume of gold sold forward by mining companies rose by 103 tonnes. That’s the biggest yearly increase since 1999, but it’s still uncertain as to whether “broad-based producer hedging” is going to make a comeback.

As quoted in the market news:

In their quarterly Global Hedge Book Analysis, Societe Generale and GFMS analysts at Thomson Reuters said the bulk of the rise in the global gold hedge book last year was driven by Fresnillo and Russia’s Polyus Gold, which announced a major hedging deal in July.

Hedging, or selling future gold production, allows miners of the metal to lock in prices for their output. While it can protect producers when prices are falling, it can also stop them capitalising on a rising market.

It fell out of favour during the 12-year bull run in gold prices that began in 2001, as mining companies spent billions of dollar closing out hedged positions.

The report states:

Of the growth in the book in 2014, the majority (85 t) came from these two companies. Together they now account for half of the outstanding global hedging.

What was also notable in the fourth quarter, and to a greater extent the year as a whole, was the rebalancing of the hedge book towards option contracts, rather than being dominated by forward sales. The two largest hedgers, Polyus Gold International and Fresnillo, were two examples to employ such structures.

Click here to read the full Reuters report.