Hedge Trimming Season

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Good Morning,

Gold prices picked up yet another 1.5% overnight as the dollar headed lower on anticipation of poor US housing and consumer confidence data being released today. A two-dollar rise in crude oil (to $126.09) was met with a correlated move in gold this time around. Near-term downside risk remains in the market as reports from several trading desks indicate that retail investor demand is still weak and large specs are seen selling into strength. Still, a commendable turn in gold over the past two days. If it can rise to and close above $905, the metal could try for $925 on this wave.

New York spot trading opened the day with a $17 or near 2% gain, quoted at $898 per ounce, as participants monitored the dollar's decline to 73.17 on the index and expected numbers to show the worst housing starts in 17 years and the lowest consumer confidence in 26 years. Still, the horror show in the statistics may not yield an automatic rate cut in June as dollar rates are half those in the eurozone and the Fed has basically signaled that it may take more than the usual pattern of bad news = rate cut guarantees going forward. Silver added 29 cents to $16.94 while platinum rose a healthy $64 to $2145 as more forecasts of $3K floated around the market this Friday. Palladium rose $8 to $446 per ounce.

The latest VM Fortis Hedging and Financial Report is out today, and for the full study you are invited to visit the link on our homepage under "Technical and Fundamental Analyses." The report contains a mixed bag of news on several fronts. The good news is that hedging fell through the floor in Q1 and that central bank sales show signs of coming in under target once again. The worrisome news is that hedging is anticipated to grow quite soon and that the ETFs have lost a sizeable amount of gold during the latest correction. Here are the highlights of the release, courtesy of Mineweb:

"Global gold hedging saw the largest decline in percentage terms on record in the first quarter of 2008 as an 18% or 4.8m ounces reduction brought the global gold book down to 22m ounces. But the Fortis Hedging and Financial Gold Report says dehedging volumes will significantly decline in 2009 and beyond.

The quarterly report issued by the VM Group said AngloGold Ashanti, Barrick, Buenaventura and Newcrest reduced their hedge books with a total of 4m ounces in the quarter. AngloGold Ashanti reduced its hedge book with 1.2m ounces, Barrick converted 1.1m ounces of fixed-rate contracts to floating-rate contracts, Buenaventura closed out its entire hedge book of 0.9m ounces and Newcrest cut its hedge book by 0.7m ounces to 0.2m ounces.

The balance of the reduction in the global hedge book came from 32 different companies making reductions in their hedge books. The first quarter of 2008 also saw the lowest total new hedging since the second quarter of 2002, at 7,137 ounces.

The VM Group has increased its forecast for hedging in 2008 to 10-12m ounces on the back of AngloGold Ashanti's announcement that it will close another 3.8m ounces of hedging this year.

"This means the global book will be only 15-17m ounces at the end of the year. The support the market has had from producer buybacks is coming to a close, volumes are likely to significantly decline in 2009 and beyond."

The mark-to-market valuation of the global book improved slightly in first quarter 2008 at an estimated negative $11.2bn, $0.1bn "better" compared to end of fourth quarter 2007, said the report. The improvement was small despite the large reduction in hedging, due to the $97/ounce increase in the gold price in the quarter.