The H-Word Is Back in Gold

Hedging.

The term had become somewhat of a dirty word in the gold business. With producers having spent the last decade attempting to reduce their hedge positions. In order to gain exposure to a rising gold price.

But it appears the tables have now turned. Gold prices have moved down rather than up. And so a return to hedging might be in the cards.

So said the chairman of the world’s largest gold miner last week.

Barrick Gold’s John Thornton said in an interview that his firm could consider hedging. “I don’t know why you wouldn’t look at it,” noted Thornton, when asked if a return to hedging was possible.

While far from a definitive statement, the fact that Thornton would even entertain the idea signals a shift in the gold industry. Where just a few years ago any mention of hedging would have sent investors fleeing a stock.

At that time, Barrick was in the process of spending billions of dollars to unwind its considerable hedge book.

It’s interesting then that sentiment around hedging seems to be shifting today. When the idea probably makes the least sense.

After all, the cost of production for a firm like Barrick is currently running very close to the spot price. During the last quarter, Barrick paid just under $1,200 to produce an ounce of gold.

It would therefore make little sense to lock in current prices by hedging.

Especially given that many other major miners are in the same boat. A fact that should signal we are are near a bottom in gold prices. Evidenced by the fact that if prices fall much further, numerous gold mines will be uneconomic–and thus risking shutdown.

But fear is the order of the day amongst gold investors. And some of them may be starting to consider how hedging could protect against the perceived risk of a further drop in the gold price.

We’ll see if such fear turns out to be founded on any fact. It could simply be the sign of a market that’s making a bottom.

Here’s to knowing when to sell,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook

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