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Asia Gold-Market tone turns positive on producers

HONG KONG: Major gold producers' aboutface on hedging their gold has lent a positive tone to the market, which could bring higher prices, traders said on Friday.

Gold was up nearly $30 from a week ago on talk of producer buybacks and after news of dramatic changes in the hedging strategies of some of the biggest gold producers.

The price fluctuated widely in reaction to each variation on strategies on forward gold sales as a hedge against price risk.

"The mentality within the mining industry is going through a review," a trader said.

AngloGold Ltd, the world's biggest gold miner, said on Thursday it had significantly reduced its hedge cover and would continue to do so. Days earlier Placer Dome, North America's third largest gold miner, said it was suspending its hedging.

The reassessment comes after a period of years in which producers' hedge books have grown tremendously and added selling pressure to the price of gold.

Now, a significant percentage of the world supply of gold for the next five years has already been sold because of hedging, traders said.

"Among the serious producers there was a sense that the accelerated supply was damaging the underlying basis of their business," a trader said.

Gold reached a three-month high of US$319 on Monday in response to Placer Dome's news, but traders were cautious about asserting the start of a bull run.

"Whether the price will continue going up is anybody's guess, but it is clear the pressure now is on the upside," a senior gold trader said.

He said physical demand for gold was sound because of jewellery sales in Europe and in the United States, which has been supported by the buoyant U.S. economy.

Spot gold was quoted at US$314.00/315.00 an ounce. Trading was quiet with Tokyo closed for a holiday.

Recent fluctuations in gold's price were a reflection that not all large producers were abandoning hedging.

Barrick Gold Corp said it would continue to use forward sales but would not increase its hedging.

Another producer which the market was watching closely was Ghanaian miner Ashanti Goldfields Co Ltd.

The company said on Thursday it was talking to its banks and other backers after a court blocked a key refinancing plan.

Ashanti was struggling with large losses on its gold hedging book and there was speculation it was buying back gold to unwind hedges.

If Ashanti were to fail, its bullion banks might be hurt and gold supply would temporarily be taken from the market, which would boost prices, a trader said.

But Ashanti's problems were mainly limited to its earlier unwise hedging, the trader said. "I don't think anyone questions whether Ashanti can be a profitable mining company again."

While the market's tone has become positive, "it is hard to get wildly excited," the senior trader said.

"We are only going back to where gold was trading in 1997," he said.-Reuters