14 September 2009

Scotiabank Certificates

The article Scotiabank and the Real Silver prompted me to have a closer look at their 2008 Annual Report. Two interesting quotes (note all dollars are Canadian):

“In Scotia Capital, revenue declined by 25%, due mainly to charges relating to the Lehman Brothers bankruptcy, valuation adjustments and generally weak capital markets. These were partially offset by record foreign exchange and precious metals trading revenues, and strong growth in corporate lending.” (p28)
“Precious metals trading revenue was a record $160 million, an increase of $44 million or 38% over last year, with higher revenues recorded in each of our major centres.” (p30).

Not surprising to see strong precious metal results from Oct 2007 to Oct 2008 (Scotiabank's reporting year). What I did find interesting is the observation by ispeakofpeak that Scotia's gold and silver certificates declined from $5,986m to $5,619m (p122), a 6.1% drop. This drop would reflect both changes in precious metal prices as well as changes in ounces held.

Unforunately, Scotia do not provide a breakdown of how many gold or silver ounces made up the certificate dollar total. But we do know that Canadian dollar gold prices were up 18% from 1 Nov 07 to 31 Oct 08 and that silver was down 14%.

If you think about it, assuming all the certificates were gold, then if the price was up 18% but Scotia's value dropped 6.1%, they must have lost a lot of ounces. On the other hand, if it was all silver, then as the silver price dropped 14% yet Scotia's value dropped only 6.1%, then they must have had an increase in ounces of silver.

Either of these would not be correct - there must be a mix of gold and silver. For sake of example and to put some numbers to it, lets assume for every $1000, $500 was gold and the other $500 silver. This is not unreasonable, I have seen many clients make this sort of "portfolio allocation" when buying precious metals. A 50:50 split by value works out as:

Gold Oz 2007: 3,996,336
Gold Oz 2008: 3,179,160
Change: -817,176

Silver Oz 2007: 220,173,903
Silver Oz 2008: 240,380,913
Change: 20,207,010

First off, some pretty impressive ounce totals, that would put them up there in my gold and silver league tables, if they were prepared to publish their actual ounce numbers.

What I do find interesting is that they lost gold at a time when everyone else (ETFs, GoldMoney, etc) were gaining. And it does not matter what you assume the split at. If you chose 75:25 gold:silver, or 25:75 it may change the amounts of gold and silver, but it still results in a loss of gold and a gain of silver.

Another interesting observation is that on their balance sheet they list Precious Metals at only $2,426m ($4,046m for 2007, p106). So dollar value precious metal liabilities only down $365m, but precious metal assets down $1,620m. This means that in 2007 they had 68% of their liabilities covered by physical but in 2008 only 43% cover.

If we look to their derivatives, p150 shows that “Foreign exchange and gold contracts, futures” with 1 year or less maturity were $2,602m out of a total of $4,239m. Gap between 2008 precious metal liabilities and physical assets was $3,193m. Conclusion: remaining 57% covered by COMEX futures and/or over-the-counter forwards.


  1. Great follow up work on the topic.

  2. See also http://goldchat.blogspot.com/2010/04/king-world-news-scotia-certificates.html for update