SAN FRANCISCO -- In the background of
today's decidedly mixed trading session were more strange goings-on in the gold market. The price of the metal fell 2.9% to $291.70 an ounce while the
Philadelphia Stock Exchange Gold & Silver Index
shed 3.7%. Today's action continued the metal's decline from its Oct. 5 peak of $325.50, a recent apex that was reached in the wake of the European central banks'
announcement that they were suspending additional gold sales.
Clearly, the stock market's gains last week and the noninflationary economic reports that accompanied them have contributed to the gold market's recent woes. But that's not the strange part. Today, precious metals traders were abuzz with the news that
had received a reprieve -- not from the governor, but from financial counterparties of its hedged book.
Oct. 5, the company disclosed it faced margin calls on its hedges, which refers to the practice of "selling-forward" gold production at spot prices. Such activities increased in recent years as the price of gold declined and some mining companies sought to lock in spot prices and protect themselves against further declines.
But when the psychology of the gold market abruptly shifted in late September, many mining companies found themselves denuded -- that is, exposed to positions at odds with the gold market's ascent.
Ashanti, for example, was sold a product structured to short call options under which the higher the price of gold went, the bigger the company's short position would get, according to one gold investor.
was the source of the contract, the source said, leading him and others to speculate over whether the "slick" New York- and London-based bankers had taken advantage of the Ghana-based mining company.
"I think they knew what they were getting into. It didn't seem that complex to me," countered Greg Tuorto, gold analyst and portfolio manager at
Tocqueville Asset Management
, which has no position in Ashanti. "It didn't look like they were doing much more than selling calls,
and if gold went up more, they'd be in a lot of trouble."
Ashanti executives did not return phone calls seeking comment, although it was late in the evening when I called Ashanti's offices and all that was seeping through was the music.
A Goldman spokeswoman confirmed the firm is one of the counterparties involved in the deal announced today, via its
subsidiary. But she declined to comment further on any specific transactions.
Neither Ashanti's Web site nor published reports specified the 15 counterparties involved in the deal.
The Wall Street Journal
recently reported the firms with the biggest exposure to Ashanti include Goldman,
Credit Suisse First Boston
American International Group
Chase Manhattan Bank
, so it's a good bet they're all involved in the transaction. Market sources speculated that
Toronto Dominion Bank
are also on board.
Playing all the Angles
Tuorto called the deal "good for Ashanti" as it gets the company "off the hook."
Specifically, in exchange for a three-year moratorium on margin calls, the company exchanged warrants potentially convertible to up to 15% of its shares. However, it's highly likely Ashanti will be taken over long before the three years are up (no doubt at a profit to the warrant holders), given that
in early October announced its intention to acquire the 68% of the company it does not already own. Additionally, South African mining giant
and Saudi Arabian Prince
Al-Waleed Bin Talal Bin Abdulaziz Al Saud
have also reportedly expressed interest.
Seems the powers-that-be on Wall Street have managed to squirm their way out of another mess of their own making. Since Goldman has been advising Ashanti on the proposed buyouts, it will undoubtedly snare fees for a takeover deal necessitated -- in part -- because of ill-placed derivatives contracts allegedly fostered on the mining company by said brokerage. Moreover, Goldman will benefit as a warrant-holder if Ashanti is taken over at favorable terms.
Say what you will about Internet IPOs (or plastics), that sounds like a business you should get your kids into.
"This is the best deal that could be worked out for everyone," Tuorto said. "I don't think anyone would go under because I don't think
Wall Street's exposure is that great. But it gets the situation over with and can be written off and ported over to a different balance sheet. It's not sitting on one trading desk's book."
The gold fund manager expressed hope the Ashanti deal -- and a similar but less-publicized one brokered by
last week -- will "remove the cloud" of uncertainty regarding hedging that has been hanging over the gold market of late.
On the flip side, there's a danger in "letting people off the hook when they do things they shouldn't do," he said, referring both to Ashanti and its creditors. "You or I wouldn't do this in our own account because we wouldn't get bailed out. They'd come take our house away."
In a final twist on this still unfolding saga, three European mining companies --
Mines d'Or de Salsigne
Gold Mines of Sardinia
-- will ask the
Bank of England
to disclose its role in the gold and derivatives market, the
England's central bank reportedly met with Ashanti officials in the past month, although it is unclear what role, if any, the bank had in the reprieve-for-warrants deal.
For those who love a good conspiracy theory, that's a delicious twist filled with irony-laden custard. Something like moral-hazard cannoli, which taste great going down (especially with some
) but can give you serious heartburn later on.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at