Expert: Steven Taylor - 3/14/2009

Question
Hi Steven
I as recently looking at a few gold companies and a few of them used the term un-hedged gold when referring to their operations. What does un-hedged gold mean.

Thanks
Tony

Answer
"Hedging" refers to the practice of offsetting the exposure to price swings. In other words, either pre-selling the product at a fixed price, or buying a financial instrument to minimize the impact of lower prices.

Most gold hedging is done by pre-selling the gold (forward selling) at a fixed price. As an example, gold may be selling for $900. A gold miner expects to produce 100,000 ounces in 2009, so in 2008 the miner sells forward his expected 100,000 ounces of production on the futures market for $900 an ounce. If gold goes to $1000 an ounce, the miner receives none of the extra $100, as he is already locked in at a price. Conversely, if gold goes to $800 an ounce, he feels none of the pain in the $100 dollar loss, either. The miner has taken the commodity price risk out of his current operations by hedging.

Unhedged producers take a lot more risk by not selling forward, but clearly in rising gold markets they will do much better by being able to capture any commodity price rises, but will perform worse in a falling market for the same reason.