When is this gold bear market going to end?
There’s a question to which we’d all like to know the answer.
I actually have gold and gold stocks on a short-term buy signal at the moment. They’re bouncing from oversold levels, as I suggested last week they would.
But today we consider a much longer term perspective by looking at one of the most controversial practices of the gold mining industry — hedging.
Of course, hedging might work in a bear market, but it’s an absolute disaster in a bull market.
With the gold price at $500, and production costs of $450 an ounce, if Company X sells next year’s production at $500, but the gold price rises 20% to $600, Company X has only made $50 an ounce, when it could have made $150. Its profits are a third of what they might have been.
Mining companies — like so many of us — have been slow to react to the current bear market. The practice of hedging has not truly reared its head. Currently, it seems about 40 tonnes (annual production is just over 3,000 tonnes) is hedged — less than 2% of annual supply.
That’s not surprising. It was some ten years after the 1980 peak that hedging really got going. By then the bear market mentality was entrenched. After the ridicule that mining chief executives suffered for their hedging in the ‘00s, it may be a while before they dare risk it again.
But if the gold price keeps falling and their survival depends on it, they will have no choice. You can bet they’re all discussing it in boardrooms right now. One will lead and the rest will follow.
Hedging is just one long-term, contrarian indicator — there are plenty of others to consider before making your investment decisions — but it is one that nobody else I’ve seen is thinking about. If it is one to go by, then this bear market might not be over until hedging once again exceeds global production. And we are a long way from that.
It all depends, of course, on whether this is a secular bear market — or just a mid-bull-market correction, a la 1975-76. But if it is the latter, time is running out for the bull to take back the reins.
Source Financial Sense
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