NEW YORK (TheStreet) -- As
furiously eliminates their hedge book, gold prices will lose a key support factor.
Hedges allow a gold production company to sell product at a set price, which can guarantee a profit if gold prices fall. When the spot price soars, however, hedging caps the company's earnings potential.
Companies with strategic hedges have been buying back their contracts through physical gold purchases over the past 10 years as gold prices skyrocketed. This consistent demand in the gold market has helped create a floor for prices, which will evaporate when de-hedging stops.
Jon Nadler, senior analyst at Kitco.com, sees a top in the gold market within a year and says if the gold market had "not had that de-hedging component ... we would be around $900 in gold
AngloGold plans to be hedge-free by early 2011. The South African producer made a surprise announcement in September that it would be able to buy back its remaining 3.22 million ounce hedge position through a convertible bond and equity offering. The company de-hedged 0.29 million ounces in the second quarter.
AngloGold is unable to comment on its move until after a shareholder meeting on October 26th.
Matthew Piggott, metals analyst, GFMS says AngloGold's action "represents the final swansong for the producer hedge book which has, over the past decade, provided support for the bull market in gold."
AngloGold follows its peers
who have been actively eliminating their hedges in the past year.
Barrick is now officially hedge-free with $700 million of obligation associated with its remaining floating contracts. The liability has been fixed, however, and does not vary with the gold price. Barrick's market cap is also more than $46 billion, making its $700 million obligation look like chump change.
Kinross still has 503,235 ounces of hedges left at an average price of $633 per ounce. The company inherited the positions from through its acquisition of
in February 2007 and is expected to close out of them in 2012.
There will always be the need for hedging contracts because banks often require producers to hedge in order to obtain money for new projects. Piggott says that required hedging by banks "is not a bad reflection on the company trying to secure the financing... A company with a good credit rating, strong balance sheet and positive cash flow each quarter may still be required to hedge."
According to GFMS Global Hedge Book Analysis for the second quarter in 2010, total net producer hedging rose to 7.19 million ounces, a 2% increase from the first quarter and the largest increase since the first quarter in 2002. These were necessary transactions to secure project financing by
St. Barbara Mines
and aren't expected to result in any de-hedging.
GFMS anticipates that any new hedge positions will be few and spread out through a myriad of companies. After AngloGold, which has 95 tons outstanding, the next biggest hedger is
with just 12 tons of contracts. These companies probably won't seek to buy back their minor hedges but will just let the contracts run their course.
Piggott says AngloGold's action will force "the
to look to other areas of demand (such as investment) to make up the difference in the absence of price support from de-hedging activity."
Investment demand has been responsible for gold's recent record highs with the gold ETF the
SPDR Gold Shares
up 16% year-to-date with more than 1,300 tons of gold. But the worry among some analysts is that if the currency environment changes or global economies begin to recover, investors will rapidly sell gold for stocks, leaving prices searching for a support level.
Written by Alix Steel in
>To contact the writer of this article, click here:
>To follow the writer on Twitter, go to
>To submit a news tip, send an email to:
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.