Financial Daily from THE HINDU group of publications
Tuesday, May 21, 2002
Agri-Biz & Commodities
Uptrend in gold to continue on producer de-hedging
MUMBAI, May 20
GOLD producers are most likely to continue to unwind their hedge-book positions throughout this year, a move that could well keep the current upward in the gold market.
Statements made by leading producers in recent times suggest a change in producers attitude because the market now demands simpler, more transparent and predictable exposures for corporates.
"Producer attitudes have changed as the bear run in gold prices has ended and as the forward premium on gold has continued to erode in line with interest rates.
However, there is no doubt that the true motivation for hedgebook reductions is equity market success.
For as long as this continues, producer de-hedging can be expected to be a clear source of support for gold,'' says Mr Kamal Naqvi, analyst with Macquarie Research Equities.
While the current upward trend in gold prices is the result of several factors including weakening of the dollar, soft equity markets, security concerns, stable central bank sales and so on, the analyst asserts that there is no single factor that has had as much direct impact on the gold market as the change in producer hedging.
It is believed that statement from world's prominent hedger Barrick Gold that it will not renew its call and variable price sales contracts which should result in a three million ounce reduction in the position by the end of the year will induce other producers follow the lead.
Thus, leading gold producers are expected to help maintain, if not accelerate, the current shareholder drive for gold producers to have simpler, smaller and more predictable hedge-books.
In addition, the action will help allay to some extent the concerns some fund managers have about large hedge-books and may encourage further interest in gold equities.
After taking into account the statements made by many gold producers in recent months and given the continued pressure being placed by shareholders, "The world's global hedge-book could fall by as much as 13 million ounces or 400 tonnes this year,'' Mr Naqvi forecast.
The whole of 2000 saw producer de-hedging of 15 tonnes which shot up almost 10-fold to 147 tonnes in 2001.
In the first quarter of this year, such unwinding touched 105 tonnes.
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