Gold dehedging gathers steam

The rate of dehedging in gold has picked up in the third quarter of the calendar year 2004.

According to a report by the Gold Fields Mineral Services Ltd (GFMS) there has been a provisional 4.6 million ounces (Moz) or 144 tonne cut in delta-adjusted positions.

The figure was up 16 per cent from the elevated levels measured in the previous quarter and left the adjusted book at 60.4 Moz or 1,877 tonne, equivalent to 75 per cent of annual gold mine production.

Delta hedging is a scheme that is designed to make the value of a derivatives portfolio insensitive to small changes in the price of the underlying.

Commenting on the findings, senior GFMS analyst Bruce Alway stated, "Buy-backs were an important feature in the third quarter which accounted for just over two-thirds of the total measured decline".

The make-up of the decline has been analysed.

The report explained that in previous periods cuts in the hedge book were concentrated in the options contracts, largely a result of major book restructuring.

This time, in the third quarter, a reduction in the forward book accounted for the bulk of the drop.

With the gains in dehedging weighted in buy-backs, the implication is that the base level of dehedging actually slowed in the third quarter.

The report points out that dehedging in the December quarter is unlikely to surpass the levels seen in the third quarter, as the rising spot price may attract further deferrals. To date no major buy-backs have been announced.

Alway concluded that the lower than anticipated base level of ongoing dehedging in some cases reflects the fact that producers are on target or have exceeded stated goals of hedge reduction for the year and so deferred delivery commitments preferring to take advantage of the higher spot market.