Gold slips on oil, caught behind hedges

Guambat has mentioned that you can get the shaft chasing gold, and presented some reasons for that after some Texans asked, "What gives?". Today, the Australian Financial Review carries a story adding yet more explanation to the problems of the quest for gold.

Mrs Guambat doesn't give stuff so long as she can wear it.

Gold majors hemmed in by hedges
Ellis Mnyandu | Reuters | New York
2006/05/02

The surge in the gold price to a 25-year high couldn't have come at a worse time for gold miners, including Newmont Mining and Barrick Gold, as a competing rally in oil could spoil their party.

Shares of the big producers have barely budged despite record metal prices, defying conventional wisdom that says where the gold price goes, so go the stock prices.

But as the price of gold burst through the $US600-per-ounce barrier for the first time in 25 years, oil prices have also skyrocketed and threatened to squeeze any windfall that most miners stand to get from the higher bullion price.

In Asia yesterday, gold was as high as $US661.63 an ounce, the highest since October 17, 1980. This year, the gold price is up as much as 25 per cent as investors diversify into precious metals. The incentives for investing in gold have included record oil prices, tension over Iran's nuclear program and concerns that global inflation could pick up pace.

Front-month US crude oil futures prices hit a record $US75.35 a barrel a week ago. For the year so far, they are up about 18 per cent.

The concern is that higher energy costs could eat into gold miners' profits as production costs soar, overshadowing any benefit from a jump in the bullion price.

For some big miners, their prospects could be made even more complicated by their hedging.

"Every dollar that you put onto the oil price, you're putting at least a dollar an ounce into the operating costs," said Victor Flores, an analyst at HSBC Securities.

Another fear - related to mega-cap mining stocks such as Newmont underperforming the shares of junior miners - is derived from suspicion that maybe the surge in the gold price won't last.

Some miners, like Barrick, hedge some of their production, to protect against falling prices. But that means they are locked in to sell at certain prices - even if the gold price goes up.

So far this year, the shares of Newmont, which has a non-hedging policy, have risen 9 per cent, compared with a gain of 37 per cent in the American Stock Exchange Gold Bugs Index of mainly un-hedged gold stocks.

Barrick shares are also up 9 per cent for the year, while the CBOE Gold Index is up 33 per cent.

"Those miners who are hedged are put in the penalty box," said Frank Holmes, chief executive of US Global Investors. "Our funds have done well because we've focused for the past four years on unhedged gold stocks."

According to Mr Holmes, the losses in hedges between Barrick and AngloGold Ashanti add up to about $US8billion ($10.5 billion) "of money that doesn't show up as earnings and doesn't show up in exploration development to find new deposits. It's lost opportunity. [This amount] is much more than the exploration companies spend a year for mining around the world".

But while every gold miner would have reason to worry about higher energy costs, analysts said the "junior" miners, which do much of the exploration, would be far better placed to offset a jump in production costs as their unhedged position helps them capitalise more on the spike in the gold price.

Bigger miners carry the weight of contracts that tie some of their production to prices far lower than the spot prices. More instances of stock underperformance could be on the cards for the big gold miners, while takeover talk fuelled gains in some smaller miners, analysts said.

See, Gold explorer lists 30pc up, May 02 12:48, AAP but also Gold's all aglimmer and miners likewise.