In retrospect, it did not make much sense to hedge as much of its future gold production as Ashanti did. However, Ashanti was faced with some daunting prospects -- significant financial risk due to an increase in debt financed by IFC that was used to finance its expansions and acquisitions. Also, gold prices declined from a high of $850 per oz in 1979 to $250 per oz. soon after Ashanti became listed on NYSE.
The Gold Anti-Trust Action Committee (GATA) article best explains the circumstances and shenanigans that led to the near bankruptcy of Ashanti Goldfields. The immediate precipitating action that resulted in the near collapse of Ashanti was the European Central Bank's (ECB - comprising European Central Banks) decision to stop selling gold in an effort to shore up the value of the Euro -- the so-called "Washington Agreement". This decision led to a sharp rise in the gold price from the low prices at which Ashanti had negotiated its forward and option contracts. This is not an action that Ashanti could have foreseen but it is precisely this kind of uncertainty that makes it necessary to engage in a counter-hedge strategy to limit the downside risk, if the original intent of the hedging strategy is not speculative. This is why Goldman can be both long and short on a hedge position. I don't call this betting against the client -- I call it common sense!
Most African countries have significant exposure to commodity price risk due to their economies' dependence on a few commodities. African countries have been actively engaged in commodities trading for more than 100 years. There is now no excuse for them to be relying entirely on outside experts. It would be best for African governments to invest in the training of commodities and derivatives experts that can help them to better manage and monitor commodities risk.
A significant part of any African government's revenues and budget is subject to significant commodity price risk -- yet how many African countries devote any attention to the subject?
With Ghana set to begin production of oil later this year, it would be just a matter of time before there is some hue and cry about irregularities in the oil industry and the usual accusations and prosecutions for financial loss to the state. This is the time for the Ghana government to identify and train experts to help manage its commodities risk instead of relying entirely on international investment banks like Goldman Sachs to do their homework for them.
How Goldman Sachs Screwed Ghana
Former Goldman Sachs clients are coming out of the woodwork with complaints that the notorious bank bet against them too. Including the country of Ghana -- or rather its former largest company, Ashanti Gold (via Credit Writedowns):
In 1998, Ashanti Gold was the 3rd largest Gold Mining company in the world. The first "black" company on the London Stock Exchange, Ashanti had just purchased the Geita mine in Tanzania, positioning Ashanti to become even larger. But in May 1999, the Treasury of the United Kingdom decided to sell off 415 tons of its gold reserves. With all that gold flooding the world market, the price of gold began to decline. By August 1999, the price of gold had fallen to $252/ounce, the lowest it had been in 20 years.
Ashanti turned to its Financial Advisors - Goldman Sachs - for advice. Goldman Sachs recommended that Ashanti purchase enormous hedge contracts - "bets" on the price of gold. Simplifying this somewhat, it was similar to when a homeowner 'locks in' a price for heating oil months in advance. Goldman recommended that Ashanti enter agreements to sell gold at a 'locked-in' price, and suggested that the price of gold would continue to fall.
But Goldman was more than just Ashanti's advisors. They were also sellers of these Hedge contracts, and stood to make money simply by selling them. And they were also world-wide sellers of Gold itself.
In September 1999 (one month later), 15 European Banks with whom Goldman had professional relationships made a unanimous surprise announcement that all 15 would stop selling gold on world markets for 5 years. The announcement immediately drove up gold prices to $307/ounce, and by October 6, it had risen to $362/ounce.
The full article at Ghana Web tells how Ashanti was driven to bankruptcy and sold to AngloGold. What really gets at the Ghanaian author and several hundred commenters is that every character in the story, down to the British gold company, was represented by Goldman Sachs.
Of course, there's nothing necessarily illegal about betting against a client -- Ghana or ACA. It depends on the exact circumstances. But this is the aspect of the Goldman SEC charges that will piss off past and future clients.
Posts
No comments:
Post a Comment