St. LOUIS () -- Global hedging fell only 2 million ounces in Q3 06, markedly less than the 5-million-ounce quarterly reductions seen in both of the first two quarters of this year.
Matt Turner, commodities analyst with Virtual Metals, told Resource Investor this may decline even further next quarter.
"There will be a similar amount or slightly less dehedging in Q4 and a similar amount in each quarter of 2007 as in Q4," said Turner.
Virtual Metals, sponsored by Mitsui Global Precious Metals, has released "," showing increased gold supply in the third quarter - or less demand.
According to Turner, dehedging can be seen in two ways: adding to demand or subtracting from supply.
Turner said if companies decide to close out hedges before they are due, they often buy gold in the open market and then use that to deliver into the hedges, which adds to demand. Alternatively, if companies can use mined gold to do it, this subtracts from supply.
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"This does mean there will be more supply of gold hitting the market, or less demand if you prefer, of 13.8 million ounces in 2006 to about 7.3 million ounces in 2007, a difference of 6.5 million ounces," said Turner.
However, despite the sharp decline in dehedging compared with Q1 and Q2, the overall trend of reducing hedging remains in place, according to the report.
The global hedge book is now 41 million ounces, 12.3 million lower than a year ago and 60 million less than its peak in Q3 2001.
In fact, the Q3 06 decline of 2 million ounces "remains reasonably large" if compared to Q3 05 and Q4 05 when it fell to just 0.4 and 0.2 million ounces respectively.
Turner said the lower dehedging this quarter as compared to the two previous quarters is mainly due to Barrick's [NYSE:ABX; TSX:ABX] major dehedging coming to a stop.
the remaining legacy Placer Dome gold hedge position for a total reduction of 7.7 million ounces in the first half of this year. The company said it only planned to do 2.8 million ounces more before the end of 2009 "at the latest."
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This quarter, Barrick made 0.3 million ounces of reductions to their corporate gold sales contracts, taking them to 2.5 million ounces. At this rate of decline, Barrick is ahead of their stated plan to remove the corporate hedges by 2009.
Most of the remaining 2-million-ounce reduction was made up by Newcrest [ASX:NCM] at 0.4 million ounces and AngloGold Ashanti [NYSE:AU] at 0.6 million ounces.
Despite the price remaining far below its May 2006 peak of $725/oz, "there seems no appetite for new hedging, according to the report."
Out of 105 companies covered, only one company added to its hedge positions: Cumberland Resources [AMEX:CLG; TSX:CLG] hedged 0.4 million ounces as part of a gold loan facility.
Outlook for 2007
According to Virtual Metals, dehedging will continue at a similar rate for the next quarter, and in 2007, at around 1.8 million ounces per quarter.
However, Turner said lower dehedging in 2007 can easily be made up by higher jewellery sales or investment.
According to the report, ETF demand was put at 18.6 tonnes in the first three days of November, compared to only 7.2 tonnes during the whole of October. And according to , jewellery demand for investment purposes is thriving in India.
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"It's also possible that dehedging will be higher than - it allows for 0.8 million ounces from Barrick, but they have promised 2.5 million ounces by 2009 at the latest, so might do it quicker," he added.
Gold for December delivery closed today at $627.70 an ounce on Nymex, down 20 cents for the session, following a rise to a high of $631.20.
Last week, gold gained 5%, and from this time last month, the contract is up 9%. From the start of the year, gold is up almost 20% from $520.75.
