Gold Selloff Sparks Goldman To Recommend Miners Hedge Production To Head Off Losses

  @natrudy on September 18 2013 10:51 AM
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    Gold bars stored in Japan. Reuters
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    Gold bars on display in New York City. Getty Images
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    Gold bars Getty Images
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Gold mining companies should lock in 2013 prices by hedging their production as all signs point to further declines in the yellow metal in coming months, Goldman Sachs Group analysts said recently.

In a research note, the analysts reiterated their forecast for gold to fall below $1,050/oz in coming months, well below its Wednesday opening price of $1,309/oz. Meanwhile, Goldman's 2014 year-end price forecast represents a 20 percent decline from current prices.

That means gold miners, who are struggling after years of inflated capital spending, should lock in gold prices at 2013 to avoid further losses in 2014 and beyond.

“We continue to expect that gold prices will resume their decline heading into 2014, when we expect economic data to solidly confirm a reacceleration in U.S. growth,” they wrote. “We recommend producers lock in current gold prices for 2013 and beyond.”

They also wrote that low inflation rates will put the next gold price uplift several years away. Additional gold supply will probably push gold prices below a common cost of production of $1,300/oz, meaning that gold miners could be operating at a loss per ounce.

Mineweb, however, notes the damaging hedging advice Goldman Sachs issued in 1999. Ashanti Goldfield followed it and was subsequently acquired by Anglo Gold, to become the current AngloGold Ashanti Limited (ADR) (NYSE:AU).

Small and medium-sized miners began hedging on gold, selling their future output at fixed prices, earlier this summer, reported the Financial Times.  

“In the last 3 to 6 months we have seen more hedging activity in gold than we’ve seen in the last 3-5 years,” said Barclays PLC (LON:BARC) metals and mining sales head Martyn Whitehead, in August.

Still, only 100 tons of gold, or 2.5 percent of annual demand, was officially hedged, down significantly from a peak of 75 percent in the late 1990s, when hedging by miners was far more predominant.

Gold prices look to post their first annual decline since 2000, as prices have plunged more than 20 percent in 2013.

It’s unlikely gold miners will decide on hedging until later this week, however.

Gold markets are first and foremost focused on any remarks from the Federal Reserve on Wednesday afternoon, when more will be known about its tapering program.

Ahead of potential scaling back of Federal Reserve support for low interest rates, holdings in gold exchange-traded funds, a gauge of investor confidence, have fallen to their lowest levels since May 2010, according to a note on Wednesday by UBS (VTX:UBSN) precious metals analyst Joni Teves.

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