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Mix-Ansicht- Gold To Fall '04 As Producers End Dehedging-SG - off-shore-trader, 18.11.2003, 12:51
Gold To Fall '04 As Producers End Dehedging-SG
-->BEIJING (Dow Jones)--Societe Generale's chief commodities strategist Frederic
Lassere predicts gold prices will fall from their current multiyear highs by
next year as producers stop dehedging and funds begin to rethink their long
positions.
"Overall, we have the feeling that the gold price should be lower next year,"
Lasserre told Dow Jones Newswires in an interview.
The market for gold will become less favorable next year amid less downside
potential for the dollar and a better performance expected in the equities
market, Lasserre said.
Moreover, the slow down in the pace at which gold producers have been closing
out their hedges, a practice commonly known as"dehedging", will further
pressure prices next year, he said.
As gold regained some of its safe haven status amid geopolitical tensions,
weak equity markets and a falling U.S. dollar, miners in recent years have
sought to reduce the size of their hedge books.
They"dehedged" by cutting back on forward sales, buying back many of the
existing forward positions or delivering into them without establishing new
positions. The trend has been broadly positive for gold, receiving a large
share of the credit for the rally that has lifted prices to seven-year highs.
"It's a vicious situation for producers," he said."Once the dehedge is over,
there is less motivation for external investors to keep investing in gold."
The question is whether funds that have clearly fueled the rally by expanding
their positions will remain keen to hold their long positions once the
dehedging process is over, he said.
Producers Prefer Not To Hedge For Now
But faced with a better economic outlook worldwide and equity markets moving
up again, producers have moved to a strategy of"not hedging" for the time
being rather than hedging or dehedging, Lasserre said.
The tendency among producers to dehedge is believed to have fallen to its
lowest level in the third and fourth quarters of this year since Sept. 11,
2001.
On the other hand, there is no urgency for the producers to resume hedging
until gold begins to fall to around $350 to $300 a troy ounce, he said.
Spot gold made an impressive comeback in Asia Tuesday, rising mainly on the
strength of Japanese buying that was triggered by a reversal in the direction
of the U.S. dollar.
After a sharp slide Monday from just shy of $400 a troy ounce to less than
$386/oz, bullion managed to edge back to $391.25 at the close of Comex trading
in New York Monday afternoon. In Asia, spot gold was quoted at $392.55/oz at
0722 GMT Tuesday.
But the expected fall in prices shouldn't trouble gold producers, Lassere
said."It's still a good price for producers if you aren't hedged."
He said the major problem could be for producers wanting to use the current
higher margins on gold to bring less profitable mines onstream.
"In that case, you need to hedge (because) the banks aren't going to finance
you if you can't provide any sort of guarantee on future cash flows," Lasserre
said.
Bundesbank Expected To Sell Bullion
Lasserre also predicted higher annual sales by European central banks as
Germany's Bundesbank and Bank of Italy begin selling after next year's renewal
of the so-called Washington Agreement scheduled to expire in September.
The Bundesbank was one of the signatories to the original European central
bank gold sales pact that was ratified in 1999.
Under the agreement, 15 central banks agreed to limit their aggregate gold
sales to 400 tons a year. But Germany hasn't sold any bullion into the market
since the accord came into effect.
The general view in the industry is that even if the agreement is renewed
next year, it could be with a higher annual limit on gold sales for the
participating central banks.
"Our feeling is that Germany will clearly announce that that they will sell,"
Lasserre said."In that case, Italy will join and France, we don't know."
Such a move by both Germany and Italy would increase annual sales, he said.
"For the time being, it's 400 tons a year," he said."I imagine we could move
up to 500 to 600 tons per year."
Lasserre estimated that Bundesbank probably has about 3,000 tons of bullion
reserves from which to sell over the next five years.
He also estimated France has around the same level of reserves, with slightly
less for Italy.
Bank Web site: http://www.commodities.sg-ib.com
-By Owen Brown, Dow Jones Newswires; 8610-6588-5848; owen.brown@dowjones.com
-Edited by Denny Kurien
(END) Dow Jones Newswires
11-18-03 0640ET
06:40 111803
<ul> ~ sg</ul>
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