Archived World Gold Council Document

12 May
1998

LONDON: 12 May 1998 - A further expansion of the market for gold loans and other hedging devices is unlikely in the short term, it is claimed in a new study of the gold market published today.

But, hedging and forward gold sales have become such a major element of the gold market that, over the longer term, the volume of gold traded in this way can be expected to increase, it is said by two leading observers of the gold industry who conducted research at the request of the World Gold Council into recent developments in the gold banking and derivative markets.

Mr Ian Cox, a former head of precious metals trading at Samuel Montagu, and Mr Ian Emsley, an economist and commodity analyst with Anglo American Corporation, have completed a new in-depth study of the impact of the increasing use being made of gold loans and sophisticated hedging techniques by the gold mining industry. Their report Utilisation of borrowed gold by the mining industry - its development and future prospects shows that hedging activities by miners have risen five-fold over the last decade.

This has been made possible by the increasing readiness of central banks to lend gold from their reserves to provide the liquidity for the funding of hedge transactions. In the last ten years central bank lending has risen from about 400 tonnes a year to around 4,000 tonnes a year today. Around 65% of all gold borrowing - between 2,550 and 2,650 tonnes - is represented by mine hedging activities.

There was a steady increase in hedging during the past ten years but it reached a peak late in 1997 and early this year. "The gradual realisation that, through a combination of market factors gold prices were on an extended downward path, led to an accelerating pace in hedging activity as the year progressed. In total an estimated 500 tonnes of additional market supply resulted," the report says.

But this scale of activity is not likely to be repeated in the short term as restructuring of some hedge positions and the likelihood of delays and reductions in the volume of new gold mining projects - which would have initiated new hedge programmes - will reduce the sum total of gold borrowing.

"Currently, the volume hedged in relation to (the industry’s) annual output represents little more than one year’s production, averaged across the market worldwide."

Longer term, however, the situation could be different as the development of low-cost gold projects will bring new volumes of hedging to the market at lower prices than are currently acceptable.

Critics of the mining companies’ hedging practices may be mollified by other findings of the study which suggest that while the combined effect over the decade of the expansion of producer hedging may have contributed to the downward trend in prices, the actions of the individual mining companies have only a marginal influence on the market, given its current size.

"The significance of ‘accelerated selling’ cannot be entirely discounted, but it needs to be placed in the context of a dynamic market in which a number of participants, including investors, speculators and central banks may equally act as sellers at a given time or price."

The authors say there are justifiable grounds for individual companies to take a pragmatic approach and give primary consideration to the profitable management of their operations through appropriate use of the forward markets. They conclude that despite the misgivings of some there is ‘a growing consensus’ in the gold industry in favour of price hedging and that differences of opinion now centre on the amount of future production which it is appropriate to hedge and the hedging strategies employed.

Contacts:
Dick Ware, CPPS, World Gold Council 0171 930 5171
Keith Irons, Bankside Consultants 0171 220 7477

Utilisation of borrowed gold by the mining industry - its development and future prospects by Ian Cox and Ian Embley. Research Study no 18, available free of charge from the Centre for Public Policy Studies, World Gold Council, 10 Haymarket, London SW1Y 4BP.

Also available here as an Adobe Acrobat  PDF file (50 pages, about 400 kb).

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