Gold producer hedging and de-hedging

Gold primarily comes to the market from mining, on average accounting for two-thirds of total supply each year. (The remaining third comes from gold recycling.) When bringing this gold to the market, mining companies have two options, namely: sell newly mined gold now (at the current price); and sell gold which has not yet been mined (i.e. still in the ground) now.

Gold hedging is the process by which mining companies forward-sell future mine production at a contractually-specified gold price. They are guaranteed to receive this price for their gold when it is produced, regardless of whether the prevailing gold price at that time is higher or lower. Gold miners may choose to hedge their production in order to protect themselves against a volatile and falling gold price. By ensuring a fixed price for their future gold production, miners can guarantee a portion of their cash flow to cover their ongoing expenses.

Conversely, gold de-hedging describes the activity of unwinding (or closing) these forward sale commitments. This enables the mining company to retains ownership of their future production and – with no contractual sales price – allows them to fully capitalise on a future rising market. This obviously makes most sense when there are expectations of a sustained rising gold price.

Since the mid-2000s, the global hedgebook – the total amount of gold committed via forward sale agreements – has shrunk to trivial levels. More recently, hedging has typically been used to help junior or mid-cap mining companies fund project development or manage their debts. These arrangements are now often of a far smaller scale and of shorter duration than hedging agreements in previous decades.

Importantly, the use of hedging does not alter the total amount of gold supplied, but will affect the timing of when this supply will reach the market. The hedging transaction will serve to increase supply (by the amount hedged) to the market now – out of available above-ground stocks – rather than when the gold is actually mined.