An Edging in Hedging – Thursday Kitcommentary


Bullion BarsThe hitherto easy going in gold’s climb to new records ran into a couple of difficulties overnight and this morning, as talk of a Hugo Chavez-brokered Libyan mediation plan and a couple of other important market impact factors prompted some profit-taking sellers to do just that and drag prices to just under current support levels. This took place even as Mr. Gaddafi‘s airborne forces bombed rebel-held oil refining targets near the town of Brega.

The irony of Mr. Chavez proposing to defuse the trouble in Tripoli should not be lost on the reader. The man was at the front of a 1992 Venezuelan uprising that bears certain striking similarities to those currently on display in Libya’s revolt of the masses against a corrupt leader. Since that time, Mr. Chavez himself has been said to have built up certain dictator-like powers.

The International Criminal Court over in The Hague opened an enquiry into Mr. Gaddafi’s actions and alleged (but very likely verifiable) crimes against humanity by stating that "there will be no impunity in Libya" and that "No one has the authority to attack and massacre civilians." Somewhere between 1,000 and 2,000 people are thought to have been killed thus far in the civil war that Mr. Gaddafi’s recalcitrance has engendered.

Ed. The on-going Libyan violence has give rise to calls for outright military intervention, despite a few hold-outs such as Russia and Turkey declaring it as "unthinkable." What appears more unthinkable is that the world once united (well, almost unanimously) against, and intervened to remove, certain individuals named Saddam Hussein or Slobodan Milosevic. The Colonel may not be in possession of nukes, but he has enough other lethal stuff at his disposal with which to wreak humanitarian havoc upon Libya’s denizens. Thus, a "no-fly zone" might be a good starting point in the process of excising the Gaddafi cancer from Libya.

At any rate, any small whiff of potential peace breaking out in Libya was quickly conducive to an overdue dip in crude oil prices and to a corresponding (at least in percentage terms) pullback in gold as well this morning. However, gold prices were also seen reacting to a couple of other factors which (absent the Libyan events) would have made for similar drops on a market day such as today. Let us examine them in order of appearance on the news scene:

First off, the ECB decided that despite the threat of inflation posed by the mini oil-shock currently being witnessed in the markets, the decision it needed to make as regards interest rates this morning was to leave them untouched. This, as the mini oil-shock presents another, larger potential danger to the common economic zone’s welfare: that of a double-dip.

The prospect of a fresh economic contraction carries a lot more weight with central bankers of all stripes than that of a rise beyond "target" levels in inflation for a short time. At the moment, the line of thinking appears to be that perhaps crude oil won’t climb to economically-destructive levels such as $120 or $140 and that even if it does so, it will not be for more than a brief period; one which should not translate into more than a transitory mini-spike in regional inflation levels.

Thus, the ECB’s benchmark rate was left unadjusted, at one lonely percent, for the 23rd consecutive month. In earlier days, the euro had made sizeable advances against the US dollar on bets that the ECB had reached the end or near-end of the ultra-low interest rate road and was prepping to make a graceful exit from that environment in the not too distant future (like August), or perhaps even sooner.

That said, the euro did not exactly roll over and die, and neither did the dollar’s mini-rally last too long against it, as Mr. Trichet planted a well-timed little word bomb in his news conference this morning. He alluded to the possibility that the ECB will…raise rates. Not in August, mind you, but the month of April of 2012. Mr. Trichet also fired off the "V" word in his media chat.

That’s "V" as in "strong Vigilance" when it comes to inflation and how to behave towards it. The mention of a specific month within which to commence moving rates around was good enough however to spark a reversal of the pattern we saw when the rate decision announcement was issued. However, the trend-change did not seem to help gold from still remaining on the downside by double-digits.

The second news item to undermine gold’s recent oil-driven rally was the fact that US initial jobless claims came in at a three-year low this morning. The headline figure, 368,000 (down 20,000 on the reporting week) appeared to confirm that the US economic recovery remains in place and that the current oil disturbance is not bad enough to tilt the equation back into recession mode.

With first-time jobless claims continuing under the pivotal 400,000 mark for the past month and with their falling 27% since last August (when the "R" alarm was once again sounded and QE2 was hatched as a consequence) confidence has risen that tomorrow’s employment data courtesy of the US Labor Department might contain some equally good news. That’s the kind of news that gold and other precious metals players generally do not welcome.

Gold spot prices traded over a $21 range of from $1,416.60 to $1,437.50 and silver gyrated over an 84-cent range as the sellers (and very few buyers) duked it out in the first hour of trading on Thursday. Platinum and palladium players also took some profits (albeit much smaller than their gold and silver-oriented counterparts) and eased.

The former traded at $1,836 (down $12) and the latter at $815 (down only $1) as the complex took cues from a 1.05% decline in black gold and was seen focusing on that development more than on the 0.14 drop in the US dollar index. The stock market, on the other hand, cheered the jobless claims data, the rise in US QIV productivity (2.6%), the Fed’s upbeat outlook on muni-bonds, and the February US retail sales figures (which came in at better-than-anticipated levels) with a 152-point rally out of the morning’s starting gate.

In the world of normal, historically valid inverse asset correlations this rally in equities did have reason to cause a fairly sizeable decline in gold. It appears that Dennis Gartman’s retreat to the "sidelines" in gold was (at this juncture) rather well-timed. The economist and publisher of the Gartman Letter scaled back to an "insurance-only" position in the yellow metal early today.

Finally this morning, speaking of "insurance" of sorts, we offer you the highlights of the latest report on gold hedging by the world of miners. The ABN AMRO review of Fourth Quarter hedging/de-hedging activities finds more of the same as well as some new patterns worth noting in this important component niche of the gold market.

First of all, the study reveals that the ten-year trend in the decline of hedging remained alive and well on the quarter, falling by 1.7 million ounces, to 4.7 million ounces- the largest such decline in four quarters. Major producer AngloGold Ashanti in fact unwound its hedge book completely in October, following similar uber-confident cues coming from Randgold Resources and Barrick. At this juncture, almost all major gold producers have unwound their gold hedge books. Is that a "good" thing?

ABN AMRO says that "we consider this bearish for the gold market since de-hedging has been a significant element of gold demand over the past decade. In fact with the gold price expected to reach new record highs this year and expectations that prices may ease from 2012 and beyond, the global hedge book could begin to rise again — albeit modestly if the majors maintain their no hedge policy. This would not only be an indicator that the gold market bull run has ended but would in itself be doubly bearish, as gold supply through forward sales adds downward pressure on prices."

However, not every miner is as confident as the majors have shown to be, as regards gold prices "to the Moon" scenarios for years to come. Some are (quietly perhaps?) beginning to see the wisdom of protection against such potential slides in the value of gold. Take Minera Frisco, for example. It turned out to be the single largest hedger in 2010 — adding 1.4 million ounces to the global hedge book. The list also added names such as: EnviroGold, Orvana, Red 5Ltd, Range River Gold, plus Golden Star Resources and others.

The collective increase in hedging amounted to a 21% gain last year and hedging activity has now been rising in each year that has passed since 2009. Without taking anything away from the potentially gold-price-bearish implications of the massive, decade-long decline in producer hedging, the ABN AMRO report concludes on a bit of an ambiguous note by pondering whether or not the emergent hedging trend is a game-changer:

"The rise in new gold hedging programmes might be due to the possibility that high gold prices have moderated shareholder resistance to hedging, or it could signal a sea change in the attitude of producers that would be compounded should the gold price begin a sustained slide. In many cases the new hedging is due to projects requiring financing, with lenders stipulating some security in prices for future production before agreeing to provide loans."

Until tomorrow, hedge your bets.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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