Ashanti Goldfields, 1999

Seven years of production, sold forward

A West African gold producer hedged with forward sales and sold options covering around seven years of its own output. When fifteen European central banks agreed to limit gold sales in September 1999, the price jumped by about a quarter in two weeks. The hedges were deeply out of the money, the margin calls were larger than the company’s cash, and a business whose product had just become far more valuable was forced into a standstill with its banks and eventually out of independence.

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What the lesson covers

1. What happened
2. The position
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Producer hedge — Selling future output forward at a fixed price to insulate a mine or field from a falling market.
• Forward sale — An agreement to deliver a quantity at an agreed price on a future date — the orthodox hedging instrument.
• Sold call — An option written away for premium, which gives up the upside on the very asset the seller produces.
• Hedge horizon — How far ahead output is sold, and so how much unmined production a mark-to-market applies to.
• Standstill agreement — A negotiated pause in counterparties’ rights to call collateral or close out, bought here with equity.
• Washington Agreement — The September 1999 accord in which European central banks capped gold sales, reversing a long price decline.

In practice

Miners still hedge, and lenders often require it, but books are sized against near-term production, margin terms are negotiated up front and many producers now prefer forwards to sold options for exactly this reason. The industry largely de-hedged through the 2000s as the gold price rose.

Read next

• Commodity Forward — Agree a price today for delivery later
• Commodity Option — Cap or floor a commodity price
• The LME nickel squeeze, 2022 — A hedge that could not be delivered into

In the app, Ashanti Goldfields, 1999 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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