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Guest Post: Recent Gold Hedging Activity – a Warning Sign?

Tyler Durden's picture




 

Submitted by Andrey Dahskov of Casey Research

Recent Gold Hedging Activity – a Warning Sign?

In the first quarter of 2011 (Q111), net gold hedging was reported by GFMS and Société Générale. A gold mining company may hedge its production on expectations of falling gold prices in order to lock in high prices and possibly avoid losses. As gold hits one nominal high after another, is such behavior a sign that the bull market in gold is over?

To answer that question, we had a look into Boliden’s (T.BLS) latest interim report. The GFMS study mentions that in Q111, Boliden was one of the most active hedgers; it was accountable for 58% of gross hedging activity during that period. Let’s have a closer look at the company.

Boliden is not a pure gold mining company. Gold is metal number three in Boliden’s portfolio, after copper and zinc. In the second quarter of 2011, Boliden produced 158.5 million pounds of zinc and 45.2 million pounds of copper in concentrates. Gold production in Q211 amounted only to 35,062 ounces; silver, 1.9 million ounces. Boliden is a regular hedger.

Under the current gold price environment, in the beginning of 2011 Boliden decided to increase its gold production. It plans to accomplish this by expanding operations at its Garpenberg zinc-copper-lead-gold-silver mine and by starting up a new mine, Kankberg, which would produce tellurium and gold. Both are located in Sweden.

Boliden used hedging to insure its planned US$614 million (SEK3.9-billion) investment into Garpenberg and US$75 million (SEK475 million) investment into Kankberg. At Kankberg, it hedged all future tellurium production and 80 percent of the gold output. The company wants to leverage on the current high gold and tellurium prices to make sure Kankberg operations remain profitable.

Boliden’s case is quite understandable. Hedging has been the company’s policy for quite a long time, and the need to insure two large new production initiatives resulted in an unusual amount of new contracts.

While Boliden seems to continue committing a significant portion of its future sales in the form of forward contracts, about 60% of all deals at the end of the first quarter make use of a different vehicle: collar options.

The collar-option strategy provides the seller with a balance of limited downside and more flexibility on the upside. The strategy in essence provides a trader (a mining company, in our case) with a price corridor for the contracts to fluctuate within. This is more flexible than setting up a fixed forward price.

It is quite interesting to see what the current price corridor for future gold sales looks like, judging by the option positions held by gold hedgers. Have a look at the following table:

Company Downside Cap Upside Cap
Minera Frisco, S.A.B. de C.V. 1,229.52 1,799.45
Industrias Peñoles, S.A.B. de C.V. 1,100 2,140-2,622
Golden Star Resources 1,050-1,200 1,457-1,930
Coeur d’Alene Mines 940.35 1,852.62

The numbers seem quite familiar. The “floors” remind one of some of the more conservative gold prices used in the current economic assessments of gold projects: US$940.35 is close to what Exeter Mines (T.XRC) used as the lowest gold price in its prefeasibility study on the company’s monster Caspiche deposit (US$1,000). The highest “ceiling,” US$2,622, is higher than most of the “best-case” mine scenarios, but is understandable as a gold price projection based on how the metal has been performing so far in 2011. In short, these numbers do not seem to reveal anything that we don’t already know… the timing, however, is quite interesting.

Timing is an important parameter in option pricing. As it turns out, on average the hedgers’ contracts span over quite a short-term period. Quoting the GFMS report:

While the industry as a whole appears to be less vehemently opposed to hedging than was the case a couple of years ago, we note that most hedging is still being undertaken over a short to medium time frame: little hedge cover extends beyond 2013.

There are outliers, however; and Boliden is one of them.

It is interesting to note that around half of [Boliden’s] contracts are scheduled for delivery between 2014-2017; the longest dated contracts seen for quite some time, put in place to secure the long term viability of the Garpenberg expansion.

As we see, the reasons behind the increase in hedging are understandable. There are no signs of a tectonic shift in producer attitudes towards gold. The most cautious ones take advantage of the metal’s price increase, but their actions are largely company- and even project-specific. Hedging can be a good way to increase investor confidence in a mining project, to insure their investments, or to secure a bank loan. We do not see that positive net hedging in the first quarter is alarming – the economic problems bubbling to the surface now should provide a lot of reasons for the gold price to continue rising for quite some time.

Finally, most of the global hedge book is comprised of recent contracts, the report says. They were entered into when gold hit nominal highs and some of the mining companies started acting protective of their future revenues.

 

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Wed, 08/17/2011 - 18:13 | 1570722 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

I thought this was Zero Hedge? Pussies.

Wed, 08/17/2011 - 18:20 | 1570734 JW n FL
JW n FL's picture

FMXconnect did a wayyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyy better job a couple days ago.. on the collar trades.. $1,700 - $2,000.

IMHO

 http://www.zerohedge.com/news/fmx-connect-gold-options-report-august-15-2011

Wed, 08/17/2011 - 18:29 | 1570766 Fukushima Sam
Fukushima Sam's picture

OT, but important for those who get most of their news from ZH...  ;-)

Workers at Fukushima claim that cracks are appearing in the ground at the plant and radioactive steam is escaping form the cracks.

If true, this could be the start of the China Syndrome scenario.

Not good...  :-(

http://enenews.com/very-serious-and-alarming-development-workers-say-gro...

Wed, 08/17/2011 - 18:46 | 1570811 JW n FL
JW n FL's picture

Thanks for the Heads Up!!

++++++++++++++++++ on we are all going to die soon!

if we were back in Greek times I would have you killed.

get it? kill the messenger?

thanks!!

Thu, 08/18/2011 - 03:32 | 1571747 Thorlyx
Thorlyx's picture

It seems, the core has left the building.....

Wed, 08/17/2011 - 18:47 | 1570816 Gringo Viejo
Gringo Viejo's picture

Where the fuck is that skank Fonda when you need her?

Can I get a fuckin' witness here?

Wed, 08/17/2011 - 18:49 | 1570820 JW n FL
JW n FL's picture

Amen!! Preach It!!

Drill Baby Drill!

Wed, 08/17/2011 - 20:14 | 1570977 narapoiddyslexia
narapoiddyslexia's picture

Sort of OT question, but not much. Silver and gold have been moving in lockstep for the last 20 hours, even down to the smallest moves.

Anybody know why? Recently, they've been ignoring each other?

Wed, 08/17/2011 - 21:21 | 1571104 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Viagra!

Thu, 08/18/2011 - 08:55 | 1572156 IrritableBowels
IrritableBowels's picture

I noticed this too.  Any info is good info...

Wed, 08/17/2011 - 21:21 | 1571101 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I thought she looked pretty good in "Klute".  Last time I saw her was at a movie theatre in Santa Monica with her then husband Tom whatever a politician at the time.

Wed, 08/17/2011 - 22:45 | 1571345 RockyRacoon
RockyRacoon's picture

She was on Charlie Rose just last night promoing a new book.

http://www.charlierose.com/guest/view/564

Thu, 08/18/2011 - 01:45 | 1571646 Oh regional Indian
Oh regional Indian's picture

Well, a Charlie "Look at my Gravitas" Rose appearence means she too is establishment. 

ORI

Wed, 08/17/2011 - 18:48 | 1570818 JW n FL
JW n FL's picture

Workers at Japan's Fukushima plant say the ground under the facility is cracking and radioactive steam is escaping through the cracks. The cooling system at the plant failed after the devastating tsunami hit Japan in March, sparking a nuclear crisis. But new evidence suggests that Fukushima reactors were doomed to cripple even before the massive wave reached them. RT's Anissa Naouai talks to Dr. Robert Jacobs, a Professor at the Hiroshima Peace Institute.

http://www.youtube.com/watch?v=fimRJocH_90&feature=player_embedded

Wed, 08/17/2011 - 18:55 | 1570839 slewie the pi-rat
slewie the pi-rat's picture

t.y., F_u_sam!

we may have a new volcano, soon, eh? 

nothing to see here...tents will be in place, conditions permitting, for those who are not raptured.  trust us!

Wed, 08/17/2011 - 21:18 | 1571094 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

F. S.  I have been taking:  sea adine, Spirulina and liquid zeolite since March as have my loved ones.  Most people give this no thought but this is a growing calamity and clean up will take 10-20 years.  I choose not to die a lingering cancerous death decades from now because I thought it couldn't happen to me.  Thanks for your intermittent posts on this truly scary issue. 

One thing I just found out is that last spring hippo hips Hillary Clinton made a deal with the Japanese agreeing that foodstuffs coming from Japan to the U. S. are safe and need not be monitored for radiation.  (Remember when right after 9-11 EPA Director Christie Todd Whitman said the air in NYC was safe to breath.)  To date more people have died from the results of contaminated air after 9-11 than died in the direct attacks.

Thu, 08/18/2011 - 00:47 | 1571592 dollarslide
dollarslide's picture

@Tuco - you might want to check out ZeoForce zeolite (powder) on Amazon, it has better potency reviews. Chlorella is good too.

Wed, 08/17/2011 - 21:24 | 1571114 Triggernometry
Triggernometry's picture

Regretably much appreciated, thanks for the link. 

This can only mean the corium (molten fuel) has melted its way down to bedrock.  FUCK

I had been hopeful the Japanese would have contained this within ten years.  Compared with Chernobyl, which is due to finally be completely sealed off in 2015, I had a good degree of confidence Japan would have tackled this catastrophe efficiently; if indeed the corium has reached bedrock, it is likely to never be fully contained.  This is horrible news for the world, even worse for Japan.

Wed, 08/17/2011 - 21:26 | 1571119 Bullionaire
Bullionaire's picture

Crap.  That "George Washington" dude was right all along.

 

Duh.

 

 

Wed, 08/17/2011 - 21:50 | 1571186 JW n FL
JW n FL's picture

LOL!!!

Georgie is the shiiizzzelll!

Wed, 08/17/2011 - 22:40 | 1571234 gall batter
gall batter's picture

OT--macondo oil well still leaking, according to this blogger, but i haven't seen anything to verify: 

http://www.stuarthsmith.com/oil-rising-from-macondo-well-bp-hires-fleet-of-40-shrimp-boats-to-lay-boom-around-deepwater-horizon-site


Wed, 08/17/2011 - 22:57 | 1571375 bbbilly1326
bbbilly1326's picture

WOW,  only 3 posts in, and the whole article is hi-jacked, away from discussion of gold, on to Fukushma.......these be some high class whores...........

Mon, 04/16/2012 - 02:25 | 2347943 jaffa
jaffa's picture

The farmer has hedged his exposure to wheat prices, he no longer cares whether the current price rises or falls, because he is guaranteed a price by the contract. He no longer needs to worry about being ruined by a low wheat price at harvest time, but he also gives up the chance at making extra money from a high wheat price at harvest times. Thanks.
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Tue, 05/01/2012 - 07:33 | 2387667 jaffa
jaffa's picture

Investment and accumulation goals is planning how to accumulate enough money for large purchases, and life events is what most people consider to be financial planning. Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement. Thanks.
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Wed, 08/17/2011 - 20:29 | 1571004 centerline
centerline's picture

Need to get some conversation going somewhere regarding the Roubini versus ZH subject that has kicked up today.  Of course, it also means ZH gets some more deserved attention too.

Wed, 08/17/2011 - 18:18 | 1570741 Cult of Criminality
Cult of Criminality's picture

Moles are eating my hedge

Wed, 08/17/2011 - 23:44 | 1571467 rosiescenario
rosiescenario's picture

...get yourself a rodentator....and some ear plugs.

Wed, 08/17/2011 - 18:20 | 1570745 caerus
caerus's picture

i'm short...i'll admit it...sucks r now...long goldschlager...

Wed, 08/17/2011 - 18:20 | 1570748 robertgray
robertgray's picture

A gold business must hedge their production. They are not speculators. They are producers. They must sell all they can at a profit. If they can lock in a profit now, that is for the best. The company (and jobs) will be here next year then.

If they held onto more gold, they would get crushed in a downturn. Cash flow is key for miners.

Wed, 08/17/2011 - 18:30 | 1570767 disabledvet
disabledvet's picture

Besides who says the bank won't just sit on the gold?

Wed, 08/17/2011 - 21:09 | 1571076 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Wrong!  If they want shareholders they'd better not limit entirely any upside potential in the underlying asset.  Best to hedge a percentage, not all.

Wed, 08/17/2011 - 23:47 | 1571476 rosiescenario
rosiescenario's picture

Yeah, as a former shareholder of ABX I was just delighted by their hedging....a brilliant strategy.

After all investors buy gold or silver miners because they believe the price of the metal is going up....they do not want to find out production was sold forward at today's price.

Thu, 08/18/2011 - 00:31 | 1571577 Spitzer
Spitzer's picture

I have heard from many sorces that base metal miners are not very brite. It makes sense that they would put themselves in a losing position.

 

Wed, 08/17/2011 - 18:21 | 1570749 dumpster
dumpster's picture

sure berrick gold was putting hedges in at 300 gold .. they really had it nailed ..lol

hedgers are not the brightest bulbs in the room

 

 

Thu, 08/18/2011 - 01:48 | 1571652 Oh regional Indian
Oh regional Indian's picture

dumpster, Barrick is a Khassogi/Bush/Some Canadian oligarch play. The details are available all over th eweb and print.  As are most large miners in the world.

You think they will own the physical and not own the source? Gold is not a safe haven in my book. Too many surprises hidden up their sleeves.

ORI

http://aadivaahan.wordpress.com/2010/10/18/an-opportunity-and-a-golden-warning/

Wed, 08/17/2011 - 18:21 | 1570752 DonutBoy
DonutBoy's picture

It's not "normal" gold time.  The global fiat currency collapse thing seems to happen about once, oh let's see, about once so far in human history.  The nation or nation's backing the three largest tradable currencies, dollar, yen, and euro, are all insolvent and they can't hide it.  I suppose one could compare it to debasement of Roman currency, arguable global, but not fiat.

This is all new, we're off the reservation.  Mining hedges don't tell me anything about what money is going to be 5 years from now.

Wed, 08/17/2011 - 18:33 | 1570774 oblonsky
oblonsky's picture

this time is different.

Wed, 08/17/2011 - 18:35 | 1570779 caerus
caerus's picture

lol

Wed, 08/17/2011 - 18:41 | 1570798 DeadFred
DeadFred's picture

Those one-in-a-trillion events seem to be happening a lot more often nowdays. This time is very different in many ways.

Wed, 08/17/2011 - 20:47 | 1571032 Manthong
Manthong's picture

A trillion ain't what it used to be.

Wed, 08/17/2011 - 18:27 | 1570755 caerus
caerus's picture

btw slim "hedged" his ag a while back...just saying...

Wed, 08/17/2011 - 20:19 | 1570991 Temporalist
Temporalist's picture

This article is for you:

Carlos Slim Owns A Fucking Silver Mine

http://ibankcoin.com/mr_cain_thaler/2011/05/05/carlos-slim-owns-a-fuckin...

Wed, 08/17/2011 - 20:36 | 1571001 caerus
caerus's picture

hell I knew that already thanks though

btw minera frisco owns six mines I believe...at least five mine ag if I remember correctly

Wed, 08/17/2011 - 18:29 | 1570763 Flakmeister
Flakmeister's picture

Some juniors are forced to hedge in order to secure the financing needed for developement. GSS probably fall into this category....

Wed, 08/17/2011 - 18:35 | 1570781 breezer1
breezer1's picture

the big money is getting physical from the mines and buying future production with lose little deals. the miners are being shorted heavily and weak hands are leaving in disgust. the strongest hands for the most part happen to be the biggest crooks. most here know the names. 

there is nothing safer in these perilous times than physical. if they return to gold based paper then they will have to devalue against it and if not its happening anyway.

i have trouble understanding why anyone would be anything but physical at this point.

 

Wed, 08/17/2011 - 18:54 | 1570836 --Freedom--
--Freedom--'s picture

Slightly off topic, but worth a try: I have a good portion of my money in physical gold and silver, but also a good portion in PHYS, Sprott's gold trust. Any opinion on the safety of this? I've read everything i can find online and it seems safe. Seems a lot better than GLD, obviously, but am considering liquidating and going to coins.
Thanks in advance if anyone has any thoughts or experience with PHYS.

Wed, 08/17/2011 - 19:05 | 1570866 High Plains Drifter
High Plains Drifter's picture

just curious. but do you live in canada or the lower 48?   the reason why i ask, isn't sprott located in canada?  might make a difference if one day, you wanted your stuff and then we have the weird shipping situations going on nowadays.

Wed, 08/17/2011 - 19:22 | 1570896 --Freedom--
--Freedom--'s picture

I live in the lower 48, but not too far from the bank where the gold is. But I just read that you need to have around 600k in the fund to be able to redeem for physical. I have much les than this, so I would only be able to trade the ETN. I would think it would keep it's value much better than other paper gold, but, still, it's a bit unsettling.
By the way, I've appreciated your posts on ZH the last few months I've been reading the threads.

Wed, 08/17/2011 - 21:05 | 1571068 chubbar
chubbar's picture

I believe the redemption is in 400 oz bars only so you can do the math with regard to how many share would equal that amount taking into account the present discount/premium on NAV.

Wed, 08/17/2011 - 21:02 | 1571058 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Sprott seems trustworthy, but look what happened to Kitco, a highly respected company.  Big brother can come in at any time and shut down the entiry holding your gold and you are screwed!  Keep it, "cool, dry and nearby"!  I invented that phrase by the way.  Hasn't made me a dime though (90% of course):)

Thu, 08/18/2011 - 07:31 | 1571881 Diogenes
Diogenes's picture

I bought PHYS when gold was under $1200, sold when gold hit $1800, and made an 18% profit.

How can that be? For one thing when I bought PHYS was selling at a 10% premium, then Sprott watered it down with new shares, when I sold premium was 2%.

Where the rest of the money went, who knows?

From now on my gold investments are in gold not paper.

By the way his new silver fund, when I checked last week, was selling at a premium of near 20%.

Wed, 08/17/2011 - 19:54 | 1570946 DosZap
DosZap's picture

breezer1,@ 18:35

WHEN did the Miners stop buying back their Hedges?,last I heard it was full speed ahead.And anyone of any size, was closing them asap.

NO idiot was willing to sell Hedged positons for future deliveries at $400.00+/-, and lose out on the largest Bull Run in history.

When did this action, turnaround?.( Last I saw, they bought back ALL thier hedged positons)

Wed, 08/17/2011 - 18:40 | 1570794 gwar5
gwar5's picture

 

So, these guys have made huge new capital investments in mines and hedged them for safety, so this not a real tell on the market price of gold going forward.

Good to know. Thanks!

 

 

Wed, 08/17/2011 - 19:28 | 1570899 slewie the pi-rat
slewie the pi-rat's picture

hi, again, g_5!     yes, this is a plausible "story" but i would research the co. myself, too before "believing" it, myself.  why?  well, everybody's favorite red-headed stepchild, doug casey, has an incredible uninterrupted record of being able to talk his own book anywhere, anythime, to anybody. i read his stuff all the time and one of my kids is a paid subscriber, too!

if i understand the piece, the company is gonna open a new mine and it has already sold 100% of the tellurium and 80% of the gold.  but we're not told how much, really are we?  80% of, unhhh,...what?  huh?  i don't care, but i'm not taking the bait, either, am i?

we also see that the parent company produced 35,000oz of gold last year.  whatever is going on, that's 350 contracts!  yearly total!  that's also 34 contracts less than were delivered on the crimex this morning. 

Wed, 08/17/2011 - 18:51 | 1570826 dumpster
dumpster's picture

so this company produces what 35,000 oz a year in gold .. which is a small part of its operations ..so they hedge a bit to make sure they secure the real operation .

and they have  hedged out a couple years

that they hedge has no relation to a true gold company ,,

thery are big in zinc ,,  and some other metal .

much ado about nothing on the price of gold .going forward .

 

 

Wed, 08/17/2011 - 19:04 | 1570864 IronShield
IronShield's picture

I got 99 problems...

but gold ain't one...

Wed, 08/17/2011 - 19:05 | 1570869 dumpster
dumpster's picture

freedom

why not just own the gold

if its not in your possession.   your waiting in line ,

sprott is good and honest,,  but the whole world knows your position,, i suspect the owners of sprott are on someones radar...    some thing about a police state that has you confused.....

 

Wed, 08/17/2011 - 20:17 | 1570981 --Freedom--
--Freedom--'s picture

Yeah, you've hit on my big concern. If I buy physical, with cash, then "lose it", my position is at least less known that if I own an etn which is more likely to be susceptible to a gold windfall profit tax, or something like that. I figure that, in a police state, better odds if I have it under my matress than an etn in a brokerage account.

Wed, 08/17/2011 - 20:55 | 1571046 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

+1

Wed, 08/17/2011 - 19:26 | 1570901 FranSix
FranSix's picture

If a base metals miner hedges its gold production, its facing a possible capital shortfall.

On Topic, gold prices:

10-year TIPS yield negative

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Wed, 08/17/2011 - 20:07 | 1570964 -Michelle-
-Michelle-'s picture

Would this hedge still protect in the event of nationalization?

Wed, 08/17/2011 - 20:54 | 1571044 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Easy answer.  Whatever will benefit the government will likely be retained and/or implemented.

Wed, 08/17/2011 - 20:19 | 1570988 lasvegaspersona
lasvegaspersona's picture

Unless you have enough shares to go to an Authorized Participant (in the case of GLD) or an amount certain (read your prospectus in the case of Sprott and others) to demand physical, then all you are doing with these ETFs is betting on the price of physical. You are not assuring physical for yourself. You must cash out in paper. If there is a failure of the paper market or the paper ($) itself you will have a big problem.

Want security? Hold physical. Want to gamble on the (manipulated) price of metal? play with paper (ETFs, futures etc...)

Wed, 08/17/2011 - 20:31 | 1571006 --Freedom--
--Freedom--'s picture

Thanks. This is the realization I'm coming to. At first I thought that I could take delivery, but once I found out that with PHYS it takes roughly 600k investment, at today's prices, to take delivery, physical started to sound better.
I think I will cash out and switch to all physical.
Just got a nice visit from mr. Ups with 2 1-oz. Bars from pamp Suisse. Feels better than checking my account and checking the price of PHYS.
Thanks again for the input.

Wed, 08/17/2011 - 21:10 | 1571081 web bot
web bot's picture

Do they do the same type of analysis for Silver?

If so, it would be instructive to view it.

Wed, 08/17/2011 - 21:23 | 1571108 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

That reminds me, did it ever occur to you that a sperm bank is the only bank in the world where when you make a deposit you lose interest?

Thu, 08/18/2011 - 08:00 | 1571966 doggings
Wed, 08/17/2011 - 22:55 | 1571370 kito
kito's picture

brad delong was deshort on gold today.. says mining stocks demonstrate gold prices are due for sharp fall. fluffin, fluffin, fluffin....

Wed, 08/17/2011 - 23:33 | 1571450 Dr. Engali
Dr. Engali's picture

I've got one word for the mining stocks underperformance ....... Venezuela. They are all in danger of being nationalized if the paper market crumbles.

Thu, 08/18/2011 - 01:29 | 1571636 irishlink
irishlink's picture

Is Venezuela showing the way?

Thu, 08/18/2011 - 01:59 | 1571662 hound dog vigilante
hound dog vigilante's picture

increased hedging also indicates there are more, sizeable gold positions - many of which have automatic hedge requirements.

increased hedging is bullish - it's a measure of large, new (likely strong/conservative) gold positions.

 

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