07 April 2010

King World News & Scotia Certificates

*Updated table on 14 Feb 2012 with 2011 figures*

In this interview, Lenny Organ (son of Harvey Organ who was at CFTC hearing) recounts how at a recent visit to the vaults of ScotiaBank they saw little physical precious metals and had to go to some trouble to get physical.

I analysed Scotia's annual report back in September 2009 after seeing a blog by ispeakofpeak on the issue. At that time the annual report revealed that Scotia only had 43% of its gold and silver certificate liabilities backed by physical metal. The table below updates that post with the most recent report (note: Scotia's financial year end is 31 Oct, figures in millions of dollars).

Year
Ending Liabilities Assets Physical cover
Oct 11 3,931 9,249 100%
Oct 10 5,153 6,497 100%
Oct 09 3,856 5,580 100%
Oct 08 5,619 2,426 43%
Oct 07 5,986 4,046 68%
Oct 06 3,434 3,362 98%
Oct 05 2,711 2,822 100%
Oct 04 2,018 2,302 100%

It appears that the physical backing was running down from 2006 but is now back to 100%+, with $5.58 billion of physical. This contrasts with Lenny Organ statement. Either Scotia have run down a lot of physical in 6 months or it is stored elsewhere.

I do find it interesting that the gold and silver certificate liability has declined from $5.619b to $3.856b in the past year, a year when most ETFs, GoldMoney and BullionVault and Perth Mint have shown increasing amounts of metal held.

I agree with Adrian Douglas' statement in the interview that many storage providers "are very vague about what is backing their paper certificates and if they are vague I think you should not give them the benefit of the doubt". Contrast this statement from Scotia about their unallocated:

"Scotiabank gold certificates are backed by the assets of The Bank of Nova Scotia. Unallocated gold is a claim on The Bank of Nova Scotia for the ounces entitlement to a specific quantity of gold bullion."

with the Perth Mint's:

"With unallocated storage, also known as a metal account, clients purchase an interest in a pool of precious metal held by The Perth Mint. The Mint purchases an ounce of precious metal from the spot market for every unallocated ounce it sells to clients. Accordingly every unallocated ounce is 100% backed. ... The Perth Mint is not a bullion bank and does not provide project financing or bullion lending/derivative services to mining companies or other entities. It does not lend client's unallocated metal to support short selling transactions or other derivative activities. The unallocated metal is utilised solely to fund the Mint's operations."

You should always read the fine print.

7 comments:

Justin said...

Hi Bron

An article by Doug Noland a few months ago made sense to me. He said that it was an accounting scandal at the US GSE's that were the catalyst for the 'sub-prime meltdown' & GFC. The GSE's were no longer able to backstop the mortgage market, leading to depreciation in 'asset' value.

I'm thinking that since most gold is evidently traded as deposits rather than actual physical gold being shifted, it would take an accounting scandal at the LBMA to cause a depreciation in 'gold assets'. Which all of a sudden seems to be here!

Are you seeing any changes? apart from a general rise in your metal holdings? COMEX spreads are still tight, I'll send you an update of the graph soon.

Mark said...

Isn't that the revelation that was made at the CFTC hearings when Jeffery Christian said that when institutions buy gold on the LBMA to hedge their short positions it's basically making "hedges of paper on paper", that in reality only one ounce of physical metal is backing every 100 ounces of "gold" bought on the spot market in London.

Are your unallocated accounts backed by allocated physical gold held in your own vaults or part of that LBMA 100 to 1 stuff?

Please clarify, thanks.

http://www.zerohedge.com/article/former-goldman-commodities-research-analyst-confirms-lmba-otc-gold-market-paper-gold-ponzi

Bron said...

I believe other sites are reporting that the Organ visit to Scotia was in 2008, which would tie in with my 43% cover rate at that time.

Our unallocated accounts are backed by our working inventory. Sure we run unallocated accounts with various bullion banks in London, which is necessary for liquidity and to allow us to give a competitive spot price quote to our customers, but we like any other commercial counterparty know that London metal accounts are unsecured creditors and thus we minimise our exposure.

Anonymous said...

Bron,

This is off the current topic but a review of previous posts on confiscation got me thinking about a couple of questions.

It seems that to minimise the risk of confiscation in Australia one should hold silver, preferably as bars, as the existing legislation does not cover the confiscation of silver. Would you agree with this statement?

Also, what would you see as the potential mechanisms and timescales for future confiscation of gold and silver and as such would there be any form of advanced warning? For example, Professor Fekete suggests that the basis would give an early warning signal that physical supply is getting tight and the risk of confiscation is rising. However surely a cunning enemy (government) would ensure that gold would be confiscated without warning before any confiscation or default/devaluation occurred ala Roosevelt 1933? But does an act of parliament have to be enacted before silver can be confiscated, giving ample forwearning?

If one felt that the risk of confiscation was rising, in your opinion what would the risks be in converting to fully allocated form and taking possession? In this instance you could still be identified as the owner. Would you have the feds on your doorstep demanding return of the gold, and in this instance would a suitable defense be that the gold had been lost or stolen? Perhaps it is an extreme example, but in the event that PM's are confiscated, all existing holders who do not return their metal would be made instant criminals.

Bron said...

Anonymous, I'll post my response at http://goldchat.blogspot.com/2008/11/australian-gold-confiscation.html as that is where it is most useful to future visitors.

Bron said...

Update from Scotiabank's 2010 annual report:

Oct 2010 metal liabilities back up to the '07 and '08 levels - $5153m backed by $6497m in metal assets, more thank 100% physical cover.

Anonymous said...

Re: Confiscation,
Has enyone ever heard of the 'Black Market?
The stupids of '33,in all Yank dominated countries,will not bend over again!!
To all the turd servants of governments,
"you want it??
go find it??
If you dare!!!"