Things have changed a lot in the gold market--in a very short period of time.
And news this week suggests that further structural changes are coming to the market. The kind we haven't seen in over 15 years.
Specifically when it comes to gold hedging. The practice of forward-selling bullion in order to lock in a fixed price.
With gold rising over a good part of the last decade, investors wanted as much exposure as possible to prices. With buyers betting that prices would continue to rise--generating increasing profits for companies that produce bullion.
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That led to a decrease in hedging--with gold producers sometimes paying billions of dollars to "unwind" their hedges. And regain complete exposure to market prices.
But a survey released on Wednesday suggests that gold companies are now going the exact opposite direction. Increasing their hedges--by a significant amount.
The study's authors--gold market experts GFMS along with Societe Generale--said they expect total hedging in the gold industry to rise to 40 tonnes of metal in 2014. A mark that would be the highest yearly figure since 1999.
There's reason to believe the prediction. In the second quarter alone, total hedging across the gold industry jumped 61% as compared to the year-ago period. Suggesting that producers are indeed returning to hedges in a big way.
The strategy makes sense in light of recent market activity. With gold prices having once again dipped below $1,200 per ounce over the last several weeks, producers are anxious about further declines. And therefore want to lock in prices in order to protect against further falls.
The 40 tonnes of total hedging predicted by GFMS this year is of course not huge in a historical perspective. Given that the previous high in 1999 was over 500 tonnes.
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But it's interesting to note that the 1999 high in hedging activity coincided exactly with a multi-year low point for the gold price--when bullion dropped to $250 per ounce. After which the market rose steadily and significantly for several years.
Here's to playing it safe,
Dave Forest
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