We are to blame for hedging

In an ideal world, gold miners would hedge their production following a big rise in the gold price and avow hedging following a price slump. In practice, they do exactly the opposite.

As gold prices slumped in the late 1990's miners rushed to lock in prices via hedging. Aggregated global hedging peaked at 2,900 tonnes in 2001, almost the exact nadir in the gold price. As gold prices rose from 2003, gold miners gradually unwound their hedge books and boasted of being fully exposed to gold prices. By the end of 2012, global hedges outstanding were just 123 tonnes, the lowest levels on record. No major gold miner in the world had any hedged production. Small miners that did use hedging were forced to do so by their banks and keenly pointed investors to a time when hedging would cease.

Now, with gold prices in a funk again, anecdotal evidence suggests hedging is back in fashion. Evolution Mining and Norton Mining are just two producers who have announced new hedges for a portion of their output, both at prices around $1,600 an ounce. According to industry reports, gold lease rates are soaring and gold lenders are enjoying their strongest returns in a decade.

Once again, miners appear to be doing the wrong thing; hedging following a price slump. Yet from management's perspective, this is understandable. When prices are rising, investors are only interested in the upside, which hedging eradicates. When prices fall, investors want protection. Hence there is enormous pressure to hedge on the way down and remove hedging on the way up. The blame, perhaps, lies with us investors.