Monday, 8/26/2013
Hedging future production at current prices hurt gold miners badly a decade ago. It's still hurting strategy today...
THERE'S always a lot of talk about gold and silver miners and their hedging policies, writes Miguel Perez-Santalla at BullionVault.
Selling some future production at current prices raises money today. It can also help the gold or silver miner smooth out changes in the market. That should be to the benefit of the shareholders. Yet the main concern in hedging isn't how to manage this trade. It is the shareholders' view of hedging which counts.
Why? Starting in the late 1990s, gold miners suffered major losses when the gold price rallied. This is because they had excessively large "hedge" positions in place far out into the future. It is imperative that the act of hedging not get confused with the reality of mismanagement of hedging policies.
As gold prices began rising early last decade, investors came to hate the big hedge-book built up by the gold miners during the previous bear market. And simply put, miners need investment money to fuel their business. If the shareholders are not happy with the way they operate their business, then their share price goes down. And if the share price goes down, then the gold or silver miner's capitalization also goes down, which then affects their ability to borrow from the banks.
So with hedging both weighing on profits and annoying shareholders a decade ago, the famous "leverage" to gold prices offered to investors by precious metals miner stocks went missing, even before the financial crisis hit.
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