Will gold miners hedge, like the 1990s, into a falling price?

Reuters recently covered the latest Societe Generale/GFMS gold hedge book analysis report, which noted that “while miners overall remain wary of hedging … those who do favour the strategy are leaning more strongly towards options”. The total size of the hedge book has increased from its low of 91 tonnes in Q4 2013 to 193 tonnes at Q1 2015, but it is still massively below its peak of 3230 tonnes in 1999 (see chart below).


A timely study considering Metal Focus was reported yesterday as concluding that “on an [all-in sustaining cost] basis, the proportion of loss-making mines at $1,100 swells to 24%”. Metals Focus say that this does not mean that mines will be shut down, as “closing a mine in itself is often a very costly undertaking” and thus “mining companies will often be prepared to operate at a loss in the short term in the hope that commodity prices recover”.


For mines running at a loss it may make sense to look at hedging even at current low prices because it provides protection against further gold price falls – extending how long they can continue to operate and thus increasing the chance they will still be around when the price recovers. While this may make sense for each miner individually, it doesn’t make sense for the industry as a whole if everyone does it. Let’s just hope miners have learnt the lessons of the 1990s.


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