I’ve just had an interesting chat with Troy of www.globalspeculator.com.au who I have a lot of time for. His response to my hedging chart is illuminating:
“It is worth considering that many gold producers are still struggling to turn a reasonable profit. Their costs have risen astronomically and some companies have actually folded (especially the ones attempting to bring old mines back into production). The ones that locked in a gold price have been the most vulnerable to collapse (massive balance sheet problems – hedge liability related), so I do not think that a mining CEO would be all that keen on taking on hedging again anytime soon. On the other hand if the gold price has a prolonged collapse hedging may be the difference between surviving and not. What we are seeing around the gold industry both here and internationally is not consistent with a peak in the gold price in my opinion. Gold supply is flat if not falling.
Your point about where the gold demand is going to come from once dehedging has run its inevitable course is a pertinent one and I think Central Banks hold the key. Central Bank selling of gold is trending lower with the Washington Agreement Quota of 500 tons p/a not being filled for the last two years (including this year although we have another month or so left). Many non-western central banks have actually begun buying (Russia, Middle East and Asia etc). I agree that it is probably not your average mum and dad retail investor which holds the key for the gold price moving forward. Once fiat currencies start coming into question and people get a better appreciation that the US dollar is not the only questionable currency, things will start to get interesting and somewhat clearer. At the moment there is just shifting from one currency to the next and gold is still very much linked to the US dollar’s fortunes.”
“It is worth considering that many gold producers are still struggling to turn a reasonable profit. Their costs have risen astronomically and some companies have actually folded (especially the ones attempting to bring old mines back into production). The ones that locked in a gold price have been the most vulnerable to collapse (massive balance sheet problems – hedge liability related), so I do not think that a mining CEO would be all that keen on taking on hedging again anytime soon. On the other hand if the gold price has a prolonged collapse hedging may be the difference between surviving and not. What we are seeing around the gold industry both here and internationally is not consistent with a peak in the gold price in my opinion. Gold supply is flat if not falling.
Your point about where the gold demand is going to come from once dehedging has run its inevitable course is a pertinent one and I think Central Banks hold the key. Central Bank selling of gold is trending lower with the Washington Agreement Quota of 500 tons p/a not being filled for the last two years (including this year although we have another month or so left). Many non-western central banks have actually begun buying (Russia, Middle East and Asia etc). I agree that it is probably not your average mum and dad retail investor which holds the key for the gold price moving forward. Once fiat currencies start coming into question and people get a better appreciation that the US dollar is not the only questionable currency, things will start to get interesting and somewhat clearer. At the moment there is just shifting from one currency to the next and gold is still very much linked to the US dollar’s fortunes.”
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