Founders Overview: 1999 Gold Gamma Squeeze. Retail won, Banks lost...
1999 Gold, Y2K, and How a Country Almost Went Under From Gold Hedging
Founders Sunday Link Topic:
Old men and 1999 Gold Y2K/Ashanti/Goldman story. You have never heard this Noone has in this much detail.
Maybe: Plus Gold CoT run through Sunday,
April 24⋅3:00 – 5:00pm
Link: At bottom
This one will be available to all premium subs afterwards during the week.
Background: Before
Clinton, Greenspan, Rubin, Gold carry trades
J. Aron, Goldman Sachs, Swiss Bank, O’Connor Trading
Lines of Credit, aggressive hedging and deal making, cash flow problems
Ramping up hedging,
Goldman selling options constantly taking over the market volumes and taking marketshare..
other banks flow trade copying in anticipation of more selling
Banks sell to banks, Banks sell to mmkrs on floor.. everyone over selling
Set up:
Hale bopp comet
Y2k
massive retail buying of the December 1999 $300 call
August phone call to cover… best trade ever
Gamma Squeeze
Marketmakers short vol, banks short vol, retail long vol.. no natural sellers left
The Race to Cover
Ashanti Gets a margin call
They cant cover it
Goldman has to unwind hedges
Ashanti has to buy back on the highs
Goldman starts buying options to cover their Vol risk
Noone sells
Goldman’s Metals desk starts buying metal
The phone cord incident?
The Result
October 1999
It would have been strange if the savage rally in the gold price had not wrong-footed some in the market. Ironically, the central banks have managed to put the squeeze on one of the developing nation producers whose businesses they were trying to bolster with their recent confidence-boosting statement. The 25 per cent jump in the price of the metal over the last fortnight has certainly succeeded in whipping the rug from under Ashanti Goldfields, a heavy hedger. The good news is that the rise has increased the value of Ashanti's unhedged reserves. But in the short term a net hedge of 10m ounces has backfired spectacularly, leaving the company exposed to the tune of $570m at a gold price of $325.
If Ashanti's balance sheet were stronger, it could probably trade through the crisis, by paying margin calls as they fall due and eventually delivering the gold. Its banks have provided it with leeway on this front by agreeing on a temporary standstill agreement. But Ashanti's lack of openness has not helped to reassure investors. With its shares in freefall, it seems likely that Lonmin, the UK group formed from Lonrho's rump, will pick up a bargain. Since Lonmin already owns a third of Ashanti, it will have first refusal on the company. Much will depend though on whether Ashanti's banks agree to cap its liabilities. If so, other bidders, including South Africa's Anglo American and Canada's Barrick, might also be interested in riding to the rescue.- Source
November 1999
Ghana's biggest source of hard currency, vulnerable to a foreign takeover. The government has responded by trying to assert greater influence over a company which has steadfastly refused to play political ball.
The crisis has already cost the minister of mines his job, and provoked a strange rescue offer by a Saudi prince. It has also indirectly roped in the Queen, for the government is trying to use her visit to Ghana this week as an endorsement of President Rawlings's policies.
The crisis has baffled most Ghanaians, because it was brought on by a sharp increase in the gold price just weeks after Ashanti laid off 2,000 workers, ostensibly because gold prices were tumbling. As a precaution against gold falling further, the company more than a third of its future production at a guaranteed price. When gold shot up $75 an ounce to more than $325 (£198), those who had contracted to buy the future production made what is known as a margin call to Ashanti to deposit more than $300m. It did not have the cash.- Source
The Lessons in Hindsight
market structure
Flow trading
Don’t overthink it
Mushroom analogy
manage risk always