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Scotiabank Certificates - Real or Paper Gold?

In this interview, Lenny Organ (son of Harvey Organ who was at CFTC hearing into precious metal limits) recounts how at a visit in 2008 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 09 3856 5580 100%
Oct 08 5619 2426 43%
Oct 07 5986 4046 68%
Oct 06 3434 3362 98%
Oct 05 2711 2822 100%
Oct 04 2018 2302 100%

It appears that the physical backing was running down from 2006 but is now back to 100%+, with $5.58 billion of physical.

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.

They may be 100% covered as at Oct 09, but in the prior years they were not 100% covered, the balance I believe was covered/hedged by futures. I understand having some liquidity float to deal with client buy/sell fluctuations, but to be 43% backed is not right in my opinion if the marketing of it implies it is.

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". With 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."

Harvey should have known his “metal” was not guaranteed to be 100% physically backed at all times. Excuse the plug, but contrast it 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.

Disclosure: Long Gold via ASX:ZAUWBA