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Gold prices are trading around record highs after climbing by about 20% since early October

Record-high gold prices are driving big deals and investments in new mines. What they aren’t doing is making companies hurry to lock in prices as protection against the market suddenly turning down.

Hedging—a practice that helps to guarantee a certain price for future output—is common among producers of commodities ranging from copper to natural gas. But it has been eschewed by the gold-mining industry after companies got caught on the wrong side of trades made during previous bull runs by the precious metal. In 2009, Canadian giant Barrick Gold ABX 0.19%increase; green up pointing triangle bought out unprofitable hedges at a cost of more than $5 billion.

So, with spot gold prices hitting a record intraday high around $2,195 a troy ounce on March 8 and increased interest rates making hedging more attractive than it has been for a decade, the question was whether big miners would blink.

The answer: Few did.

“Our policy is very clear: We do not hedge gold,” said Tom Palmer, chief executive of Denver-based Newmont NEM -0.96%decrease; red down pointing triangle, the world’s biggest gold miner. In 2007, Newmont spent $578 million to buy out its hedge book. “When gold goes for a run, we get the full advantage of it,” Palmer said.

The combined hedge book of gold miners rose by around 10% in 2023 as gold climbed to new highs, according to preliminary estimates from the World Gold Council, an industry body.

But, at roughly 192 metric tons, total hedges remain negligible compared with the bets the industry once placed. At the start of the 2000s, the gold-mining industry reported hedges totaling about 3,000 tons.

Signs of gold miners hedging are closely watched because of the impact it has on global supply. When miners unwound big hedges before, it helped to stoke a rally in gold prices. A return to hedging would likely have the opposite effect.

Most new hedges agreed in recent times are mandated by lenders to guarantee returns from new projects, and typically span a year or two instead of a decade.

Jim Beyer, chief executive of Regis Resources RRL -2.11%decrease; red down pointing triangle, a roughly $1 billion Australian gold producer, recently signaled relief at ending an onerous hedge book agreed years ago at roughly half of today’s gold price. “If I can borrow some words of the very talented Freddie Mercury, we wanted to break free,” Beyer told analysts last month after spending about $65 million to buy out the hedges.

Many miners say their shareholders invest in gold precisely because they want exposure to swings in the precious metal’s price, and that hedging damps this.

“We see investors do want exposure to gold…so the more unhedged we can keep that exposure, the better,” said Jake Klein, executive chair of Australian gold producer Evolution Mining EVN 0.90%increase; green up pointing triangle.

Not all gold miners abstain from the practice. Australia’s Northern Star Resources NST -0.36%decrease; red down pointing triangle, a $10 billion company, hedges about 20% of its production. It recently added some opportunistic hedges to take advantage of higher prices. New York-listed AngloGold Ashanti AU -0.77%decrease; red down pointing triangle said it puts some hedges in place to help manage the risk of high costs at its Brazilian operations.

Evolution also has some hedges, designed to guarantee a return from the expansion of a gold operation in Western Australia. But it isn’t looking to add more, even if prices fall.

“Our view is that the best hedge to a gold-price decline is a low cost of production,” said Klein.

Gold prices are trading around record highs after climbing by about 20% since early October. Analysts say falls in Treasury yields and U.S. dollar weakness partly explain the rise. Both typically move in the opposite direction to prices of gold, which is dollar-denominated and pays no income.

They also cite ongoing geopolitical concerns, with gold viewed by some as a haven from volatility, and demand for bullion and jewelry in China. A recent rush by a number of central banks to buy gold has played an important role, too.

Miners are using that windfall to build and expand mines, and to acquire rivals. A number of companies have sought to invest in assets that also produce copper, an industrial metal that is considered essential to the energy transition.

Analysts widely expect gold prices to remain elevated this year at least, supported by expectations the Federal Reserve will begin cutting rates, improving the metal’s appeal. Still, others question whether the rally can continue, as high prices might damp the appetite of central banks and others to buy more.

The next test of whether gold miners regain an appetite for hedging will happen when gold prices appear to trend lower, and executives fret about maintaining profitability, said John Reade, chief market strategist at the World Gold Council.

“Circumstances change, and so do shareholders,” Reade said.

China’s industrial production jumps

Boost for policymakers comes as they struggle to counter slowdown in world’s second-largest economy

China’s industrial activity picked up at the start of the year in a boost for policymakers as they struggle to counter a two-year property slowdown that continues to weigh on the world’s second-largest economy.

Industrial production leapt 7 per cent year on year in January and February, combined data from the National Bureau of Statistics showed, the fastest rate of growth in almost two years and above an anticipated 5 per cent rise from economists polled by Reuters. Retail sales added 5.5 per cent, in line with expectations.

China’s economic data is being closely watched for any signs of improved momentum after a period marked by deflation, low consumer confidence and a property cash crunch that has spread to some of the country’s most trusted developers in the past year.

The real estate sector remained under pressure in January and February, official figures showed on Monday. Property investment fell 9 per cent year on year in January and February, although at an improved rate of decline than December, when it fell 24 per cent. New construction starts plummeted 30 per cent, the worst fall in more than a year.

Zichun Huang, China economist at Capital Economics, said the overall data marked an improvement, with economic momentum expected to “improve further in the near term” and benefit from support measures.

But she pointed to the economy’s “underlying structural challenges”, a reference to the reliance on the property sector for economic activity. “The correction in property construction is still in its early stages,” she noted.

Beijing has set a growth target for the year of 5 per cent, similar to last year and the lowest in decades. China’s leadership this month emphasised the need for stability during an annual meeting of the country’s rubber-stamp legislature. Gross domestic product increased 5.2 per cent in 2023.

Xi Jinping’s administration has stopped short of providing any major stimulus to counter the property sector’s woes, which was triggered by the failure of Evergrande in late 2021, and has prioritised the completion of unfinished projects. Property sales by floor area dropped 20.5 per cent year on year in the first two months of 2024.

This month China Vanke, partly owned by the state-owned metro in the southern tech hub of Shenzhen, became the latest developer to face consumer and market scrutiny amid concerns over its sales and the viability of private-sector property development. Overall, funds raised by developers dropped 24.1 per cent in January and February, when China’s statistics bureau combines two months of data to avoid distortions from the lunar new year holiday.

Fixed-asset investment rose 4.2 per cent, which analysts at Oxford Economics suggested was “likely supported by a state-driven push early this year”.

Urban unemployment rose to 5.3 per cent, from 5.1 per cent in December.

Claudia Buch says eurozone lenders face rising insolvencies, geopolitical risks and upheaval in energy-intensive industries

European banks must brace themselves for rising insolvencies, greater geopolitical risks and upheaval in energy-intensive industries, the eurozone’s new chief banking supervisor has warned.

Claudia Buch, who became chair of the European Central Bank’s supervisory arm in January, said in an interview with the Financial Times that banks were “not out of the woods yet” despite emerging in what she said was a “good position” after the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine.

The ECB’s increase in its benchmark interest rate to a record high of 4 per cent to tackle soaring inflation last year “still has to filter its way through the financial system”, Buch said, adding that bankruptcies and loan defaults were likely to keep rising for some time.

“It’s just extremely unlikely that we would have a period of structural change where there’s no increase in defaults,” she said. Europe’s “industrial regions will look very different in the future, depending on the availability of renewable energy in different countries”.

“We will have more relocation of activities, we will have more sectoral relocation . . . firms have to adjust,” she predicted. “This is something banks have to factor in.”

European insolvencies fell sharply in 2020-22 when governments provided vast amounts of aid to companies to blunt the impact of the pandemic and the energy crisis caused by Russia’s war. But they have since risen higher than pre-pandemic levels, as stagnant growth, rising borrowing costs and high energy prices took their toll on more companies.

Banks in the region have enjoyed a surge in profits as low defaults and high interest rates boosted lending margins. This has put them on course to return more than €120bn to shareholders in 2024, up more than 50 per cent from last year.

Yet Buch worries about complacency because the methods banks use to gauge risk are too backward-looking. “Most of the risk models that the banks are using don’t really give us a story about how risks will evolve in the future, because they are based on the past,” she said.

Promising to be “very vigilant” on this issue, Buch wants lenders to use more specific scenarios to map out how risks may materialise in the future. “Take, for example, the Red Sea scenario, or sources of fragmentation of global supply chains: how would that affect the specific corporate customers, the sectors to which the bank is exposed?” she said.

Buch, who was previously vice-president of Germany’s Bundesbank, is not well known to many bank executives and analysts. But her tough message is already starting to sink in. Andrea Filtri, co-head of research at Mediobanca, last week described the “Buch doctrine” as “a new philosophy of regulation, based on a greater emphasis on ‘unknown unknowns’.”

Shares of European banks still trade at a significant discount to their US rivals and some executives — such as UBS chief Sergio Ermotti — have blamed excessive regulation for holding back lenders in Europe.

Yet Buch gave these claims short shrift. “This is what we also sometimes hear from industry — that we are too strict,” she said, adding that the ECB had calculated how US rules would affect the biggest European banks and found their capital requirements would be higher.

“If anything, we don’t find evidence that our rules are stricter for these largest banks,” she said. “For Europe’s smaller and mid-sized banks, US regulation would result in slightly lower capital requirements. But I’m quite glad about our stricter approach, given what happened recently at several mid-sized US banks.”

She pointed out that the valuation gap between European and US banks was similar in other sectors of the economy. “So that brings us to a broader question. What is driving these differences in valuations?” she said, pointing out it could reflect Europe’s thinner and more illiquid capital markets, or its lower growth potential.

Banks also privately complain about the ECB’s recent threat to impose daily fines on those that do not meet its expectations for tackling climate change risks, saying companies are not providing them with the information they need.

Buch said it was “realistic” for banks to meet those requirements, and gave the example of energy-efficiency certificates for mortgages. “That is something one can, in most of the countries, easily get at a certain price,” she said. But, she added, “even in that space, we’re seeing deficiencies, so the banks are not getting the information that they should get in order to assess these risks”.

The threat of daily fines, while yet to be enforced, is “a general escalation tool that we would use for other issues”, Buch said.

Such issues could range from banks’ outdated IT systems to shortfalls in data aggregation and reporting. The ECB is also in the middle of a stress test exercise to assess banks’ defences against cyber attacks, which Buch said “have gone up” in recent years.

Her team continues to put pressure on European banks with operations in Russia to exit. Buch said eurozone banks had cut their Russian activities by half in the past two years and those still present, which include Italy’s UniCredit and Austria’s Raiffeisen, had been given “clear expectations on how we expect a downsizing of activities and exit strategies”.

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Future of Retail

The category’s biggest brands by market capitalisation report results this week, and will need to show they have a plan to fend off fast-growing competition.

The activewear market is booming right now, and is expected to grow faster than fashion overall for years to come. And yet somehow, the category’s biggest players seem to be constantly in crisis.

Last week saw running shoe upstart On’s stock drop as it told investors it would grow sales by a mere 26 percent in the first quarter (while most companies would be thrilled with that number, On’s been on such a hot streak it counts as a disappointment). Under Armour founder Kevin Plank unexpectedly reclaimed the CEO role amid a bumpy turnaround. Li Ning was reportedly considering taking his namesake brand private. The less said about Allbirds, the better.

The common thread here is that the hot new thing quickly becomes old news. At the same time, the cost of reinvention can be staggering. Where a fashion brand can refresh itself with a new silhouette or a smart marketing campaign, activewear customers are often looking for new materials and performance-enhancing design, both of which are expensive.

This week, Nike and Lululemon, the two biggest activewear companies by market capitalisation, report results for the fourth quarter of 2023. Both have pinned their future success on innovation.

Nike is beset by problems to a degree not seen in decades. Sales are expected to grow a paltry one percent in its current fiscal year, which ends in May. The brand relies on a handful of classic styles to keep consumers hooked, with diminishing returns, and recent marketing campaigns have fallen flat. Nike’s professional sports business is also mired in controversy, with Major League Baseball players complaining about cheap-looking jerseys and see-through pants, and FC Barcelona threatening to walk away from a 25-year partnership.

This week is all about hitting — and preferably beating — that already low growth target (setting aside the pandemic and the 2009 recession, you have to go all the way back to 1999 to find a year when Nike performed so poorly). Chief executive John Donahoe, who has talked up innovation as the key to Nike’s turnaround plans (seriously, he used the word 20 times in the company’s December earnings call), will also need to show that R&D is resulting in products consumers actually want, and not just uniforms baseball players hate.

Lululemon almost has the opposite problem – it’s performed so well recent years that it’s becoming challenging to dream up new ways to grow. First there was the pandemic, which normalised the idea that athleisure could, and should, be worn everywhere. A big push into menswear also paid off.

The company will give its 2024 guidance along with its results, and investors will be looking to see if it can keep up the ambitious pace of recent years. That will depend on some old-school retail strategy – investment in bigger, better stores and category expansion – but also that elusive idea of innovation. Lululemon is constantly introducing products it says are better-performing, and better for the planet. To cite one example, the brand last month introduced a prototype for a shirt made from recycled nylon, and says it plans to transition all of its nylon apparel to recycled or renewable sources by the end of the decade. The question is whether consumers want any of that, or if the athleisure mindset has fully taken hold, in which case the smaller, trendier Alo Yoga becomes an appealing option.

You’d rather be Lululemon than Nike right now. But both companies are proof that, like sharks, even the biggest sportswear brands have to keep moving to survive.