Gold miners have traditionally done a poor job timing the market, but this time may be different.
Major commercial producers of gold have been riding the metal higher since the summer by refusing to sell future production, and there's no sign they are going to change their minds anytime soon.
"No, they are not [hedging] at all," said commodities expert Dennis Gartman, publisher of the Gartman Letter. "It's anathema to them right now."
As of Nov. 2, gold producers were short about 461,000 gold contracts and long some 184,000 contracts, representing a short/long ratio of 2.55 to 1, down from 4.1 percent a year ago, according to the U.S. Commodities Futures Trading Commission.
Given that miners are inherently "long" gold because they own deposits, they are always net short in the futures market. But the lower the ratio is, the more it reflects a bullish outlook on prices. In July, shorts exceeded longs by just 2 to 1. Gold then proceeded to rally more than 20 percent since then before pulling back.
There have been other instances of good timing recently: Miners refused to sell the bottom during the market panic after the subprime bubble broke, keeping the short/long ratio at just 1.7 to 1 in November 2008 when gold traded for about $700. It would climb more than 50 percent over the next 12 months.
Producers also started selling the metal a year later as gold rallied, pushing the ratio to 4 to 1 in September and October 2009. While they were a little early calling the top, when gold did break in December, it proceeded to fall about 13 percent over the following three months.
Barrick Gold, the world's largest producer, set the stage for the current speculation last year when it announced a plan to eliminate its forward hedges on gold production. The move appeared risky at the time because the company paid $3 billion upfront, which it financed by selling stock and issuing debt.
But it has paid off, and let ABX beat analysts' forecasts each of the four quarters since the hedges were removed. Company CFO Jamie Sokalsky told Reuters last month that hedging is still "off the table."
(Recent trading patterns in some gold stocks suggests that the next move may be consolidation across the industry. See this recent story for more.)
(A version of this article appeared in optionMONSTER's Open Order newsletter of Nov. 15. Trade graphic courtesy oftradeMONSTER.)
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