A recent report from the World Gold Council showed a 99% year-over-year drop in hedging among gold miners through the third quarter of 2024.
That bet paid off, as the spot price of gold rose from about $1,850 an ounce to all-time highs of more than $2,700 an ounce in a year.
However, the report also showed the massive drop in hedging techniques used by gold miners in modern times, as last year miners hedged only about 23 tonnes of the metal compared to nearly none in Q3 this year. In decades past, miners had years where 400 to 500 tonnes of gold were hedged.
What happened to hedging?
Hedging became a widespread practice in part due to contango, meaning futures prices are almost always higher than spot prices and the curve typically shifts due to the interest rate climate.
“Hedging was originally a way to manage risk. It enabled miners to secure credit and protect revenues from falling gold prices,” said Joe Foster, gold strategist at VanEck. “However, hedging became excessive from 1995 to 1999 as companies increasingly used hedging as a way to speculate on the gold price.”
Gold miners learned a valuable lesson during that period of overexposure to hedging. At the time, during the dot com boom, gold was temporarily seen to be an outdated investment option that paled in comparison to the big profits internet companies were raking in.
And then the price of gold rose 41% in two weeks during a period of trading in September 1999.
The move caused one of the largest gold miners, Ashanti, to nearly go bankrupt due to margin calls as a result of an 11 million-ounce hedging strategy on its production of just 1.7 million ounces.
“The Ashanti crash sent shock waves through the gold industry, resulting in the huge decline in hedging from 1999 to 2000,” Foster said. “The securlar bear market for gold ended in 2001. … As the gold price rose, an increasing number of hedge positions that were struck at low gold prices in the 1990s fell underwater. By 2007, gold surpassed $600 per ounce, and some of the heavily hedged majors had books that were billions of dollars in the red books.”
Companies covered their shorts and since about 2011 have not participated in major hedging techniques. That’s likely to continue moving forward, Foster said.
“We believe the gold industry is financially sound and stable now, positioned to possibly generate positive returns for shareholders in the next cycle.”
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