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Global gold dehedging falls in Q2, gold ETF flows slow

The global hedge position for gold has continued to fall albeit slowly as the pace of dehedging has slowed, while the pace of investment in gold ETFs has declined drastically - and is now reversing.

LONDON, 12th August 2009 (Mineweb) by Lawrence Williams

The latest BNP Paribas Fortis Hedging and Financial Gold Report, sponsored by Fortis Bank and published by VM Group and Haliburton Mineral Services has been published today and, as expected, has shown that gold dehedging has slowed dramatically this year with many major positions already having been run down. However, a new bout of major dehedging from AngloGold Ashanti saw global gold hedging fall by a larger than expected 1.2 Moz (37t) in Q2 09, taking the delta-adjusted hedgebook to 14.7 Moz (458t). When measured in committed ounces the decline was a slightly larger 1.3 Moz (41t).

Not only did AngloGold Ashanti make a 0.65 Moz (in committed ounces) reduction in Q2 09 through the addition of a forward long, it also announced that it had reduced its hedgebook by another 0.74 Moz in July after the end of the quarter, and that it planned to reduce its book to 4.1 Moz by year-end. This means, says the VM Group, that the company's total 2009 dehedging will probably be about 1.9 Moz which is larger than expected and means the analysts have revised their forecast for global dehedging in the full year to some 2Moz to 4Moz.

Nevertheless, VM points out, compared with previous years dehedging volumes are clearly falling as the global book contracts. The year-on-year decline in hedging now stands at 4.0 Moz, the lowest it has been since it started collecting detailed quarterly records in Q2 01. Back then the global hedgebook was over 100 Moz.

But AngloGold represents the only major dehedger in Q2 09 as no other company made a reduction of more than 0.1 Moz to their hedgebooks, although a total of 31 companies also reduced their positions.

Also, in stark contrast to Q1 09, VM reports that there was very little new hedging, in fact just one mining company - Coeur d'Alene - increased its position in the period under review, and then by just 22,500 oz. However it is felt that new hedging will pick up a little in the next two quarters of this year.

Turning to the exchange-traded funds (ETFs), flows into the 16 physically-backed gold ETFs have slowed dramatically in recent months. Q2 09 saw 47.3t purchased, only slightly more than a tenth of the 458.3t bought in Q1 09. Since the end of the quarter, July has actually seen net outflows of 41.0t and these have continued to date in August.

Central bank sales have only continued at a very low rate as it seems that central bankers are beginning to view gold in a slightly more positive light in the face of a declining dollar. Sales from the Central Bank Gold Agreement (CBGA) signatories having sold just over 140t by end July, on course for the lowest annual total ever of 160t - 180t. Sales in July were only 1-2t.

In a feature article this quarter, VM looks at the implications of the renewed CBGA for another five years at a maximum of 400t/year, and the IMF's plans to sell within this Agreement. It reckons that it can actually see little in the way of major selling ahead, apart from by the IMF, with current appetites for gold sales extremely limited from the CBGA members. The Swiss have already intimated that the have no further sales plans.

‘Aside from Switzerland', the report notes, ‘of the large holders Germany has edged away from selling in recent years and Italy is embroiled in a gold tax dispute between the government and central bank, which suggests sales are not on the agenda at the moment (although if the government fails to raise revenue in this way it might increase the possibility of sales in the future). That leaves France, which will probably sell some more (although again its lower level of sales in the last few months suggests otherwise), plus sales from maybe the ECB and some of the smaller holders. This would give an annual rate of around 200t-250t only.'

With the IMF itself saying that sales would take two to three years to complete, this suggests that it may sell its 403.3 tonnes at rate of from 134 - 200 tonnes a year. The VM Group report also notes that the Fund said it planned to use any excess profits received from the gold sales over $850/oz to boost concessional lending to poorer countries, with the rest being used for a fund to provide an endowment to provide future funding for the IMF. VM Group's take on this is that this altruistic usage of ‘excess profits' from its gold sales implies perhaps that the central banks, even if they wish to sell, may feel obliged not to sell during the period the IMF does, in order to maximise the gold price and hence revenue that the IMF receives.

Matthew Turner, VM Group's author of the Q2 report, said: "Although dehedging volumes will never match those seen in previous years, AngloGold Ashanti's continued programme has ensured that the market continues to receive support from this sector."

The report covers the gold hedging positions of 116 mining companies worldwide, accounting for 69% of global production and more than 95% of all global gold hedging. The report tracks all gold ETFs and all publicly available central bank data.

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