GFMS in alliance with investment bank Investec and Brady, the quantitative analysts, and Virtual Metals, in conjunction with Mitsui Precious Metals and Halliburton Minerals Services, have produced their respective reviews of the gold miners’ global hedge book and its developments during the September quarter.

Not surprisingly the headline conclusions are similar, with both houses reporting small reductions in the outstanding book.

The cumulative reduction in the hedge book in the first nine months of the year is estimated by GFMS at 3.96 million ounces or 123.0 tonnes against 10.04 million ounces or 312.3 tonnes in the equivalent period of 2014. This effective 189.3 tonnes increase in supply (as opposed to production) will have been easily absorbed by the very strong physical demand in the market, this year, as evidenced by higher prices in all currencies, a concept discussed by both reports.

GFMS reports that the overall book was reduced by a modest 0.99 million ounces (30.8 tonnes) while Virtual reports to one fewer decimal places and estimates the change at effectively the same figure, i.e. 1.0 million ounces.

The estimates of the component parts vary slightly, as is to be expected, but the differences are not substantial. As far as the overall outstanding outstanding book is concerned, GFMS returned a provisional 54.04 million ounces (1,618 tonnes), equivalent to 68% of annual mine production, and Virtual reports 52.8 million ounces (1,642 tonnes or 69% of mine production) a difference of 24 tonnes or 1.5% and approximately half the peak level of 103 million ounces in the third quarter of 2015.

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The options position obviously varies enormously with price (see below) and the committed ounces position is a better guide to the underlying state of the market. This effectively means ounces sold forward or committed under a loan structure and committed ounces at the end of the quarter amounted to 42.53 million ounces in GFMS’ estimation (i.e. 1,323 tonnes), a drop of 1.62 million ounces or 50.4 tonnes. Virtual too returns a result of 42.5 million ounces.

GFMS and Virtual both estimate the reduction in forwards at 2.01 million ounces, GFMS highlights the fact that gold loan position increased by 0.45 million ounces as a result of a restructuring by Lihir Gold, giving a net change of 1.6 million ounces or 50.4 tonnes for the quarter. Virtual does not put this up front, but accounts for it in the body of the report.

There was an increase in the net nominal value of vanilla (straightforward) options, resulting from a combination of a modest book restructure on the part of AngloGold Ashanti (which reduced its nominal position outstanding, but this was then extended on a delta basis by higher prices), along with fresh option hedging against project finance and the taking of defensive positions. While both houses point out that the overall increase in the net vanilla options position was extended by the increase in the gold price, which increased the delta effect on the market as a whole; Virtual estimated the total increase at approximately 500,000 ounces while GFMS puts it at 660,000 ounces. It is here that the two houses show discrepancy in their figures, which must presumably be ascribed to slightly different methods of option valuation.

Virtual notes that on a regional breakdown, the leading dehedger was the Americas, whose hedge impact was reduced by 0.8 million ounces (25 tonnes), but nonetheless remained the most heavily hedged region at 27.8 million ounces, well over half the global total. In the Australia region there was a sizeable reduction from Newcrest of almost 0.4 million ounces (the largest individual reduction anywhere in the world during the quarter), other companies increased their hedge commitments and this means that the net change in the region was a contraction of 0.3 million ounces, leaving the regional impact at 11.6 million ounces. The AngloGold Ashanti restructuring, meanwhile, meant that the net African position increased by 0.2 million ounces as higher prices extended the impact of call options.

Virtual also notes also that the mark-to-market value of the global gold book was minus $6.8 billion, an increase of $1.5 billion as a result of higher spot gold prices. The break-even point would be gold at US$339/ounce. Virtual makes the point, however, that most mining companies are under no obligation to close out their hedge books at present and that the mark-to market value is a notional measure. The house also points out that as the gold price rises so too does the value of reserves in the ground. This is a worthwhile point to make as FAS133 requires the publication of a mark-to-market on the hedge book for quarterly reports but these can at best only be a snapshot. All of these fluctuations have an effect on the gold IRA retirement plans and a 401k rollover might not be the way to go these days.

GMFS, meanwhile, estimates that the 0.67 million-ounce increase in the net delta hedge position was the result of a “significant” 0.85 million ounce (26.3 tonnes) rise in the net delta call position, partly offset by a 0.18 million ounce (6.5 tonnes) rise in the net delta put position. The increase in the spot gold price (from $437.10 to $473.25) over the quarter was partly responsible for a 5% quarterly increase in the implied delta and GFMS tabulates the impact on the global book of a matrix of changes in the gold price and in volatility.

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Both reports model more than 90 mining companies and although they cannot all be written up in systematic detail there is a useful summary of the salient points underlying the data collection and interpretation. GMFS makes the point that the four largest hedges (Placer Dome, Newcrest, Barrick and AngloGold Ashanti) account for approximately two-thirds of the global book, while Virtual notes that these four between them only reduced their combined book by 0.7 million ounces rather than the 1.2 million ounces implied on the hedge schedules, again because of the impact of the gold price on the AngloGold Ashanti options position. Both consider the implications behind the potential Barrick take-over of Placer as well as going into considerable delta on individual books and sensitivities along with a quarterly market review.

Essentially the mining sector continues to unwind its hedge book, and although there is evidence of some new hedging against project finance the trajectory continues to be downwards.