Andy’s Notes: Considering this bank is on the mat and has had to
be ‘helped’ quietly on at least two occasions already, this is quite a
development. It should also serve to be another lesson to people looking to
invest in real money. Keep it close. Eliminate financial intermediaries. It
does you no good in a bank, depository, or mint halfway around the world even
though some of the great ‘economists’ in the alternative media make a bundle
of money off the above.
While the trading world was focused on the latest news involving Deutsche
Bank, namely that the troubled German bank had been contemplating
a merger with Germany’s other mega-bank, Commerzbank as part of a
strategy to sell all or part of a key business to speed up its flagging
overhaul, a more troubling report emerged in a German
gold analysis website, according to which Deutsche Bank was unable to
satisfy a gold delivery request when asked to do so by a client of Germany’s
Xetra-Gold service.
But first, what is Xetra-Gold?
According to its website, the
publicly traded company “provides investors with an efficient instrument to
participate in the performance of the gold market. Xetra-Gold’s combination
of features – cost-efficient trading and the right for physical
delivery of gold – makes it an attractive product.”
Among its highlights, Xetra-Gold
lists the following:
Cost-efficient trading: No mark-up fee, no transportation
or insurance costs such as those incurred when purchasing physical
gold. Only the standard transaction fees that are charged for
on-exchange securities trading are payable at the time of acquisition. The
spreads that apply to purchase and sale correspond to the standard conditions
on the global market and are considerably lower than those for traditional
gold-based financial products. Furthermore, management or administration fees
relating to Xetra-Gold are not incurred. The investor pays the amount
of custody fees which he/she has agreed upon with the depository bank.
Physically backed: The issuer uses the proceeds from the issue
of Xetra-Gold to purchase gold. The physical gold is held in custody
for the issuer in the Frankfurt vaults of Clearstream Banking AG, a
wholly-owned subsidiary of Deutsche Börse AG. In order to
facilitate the delivery of physical gold, the issuer holds a further limited
amount of gold on an unallocated weight account with Umicore AG & Co. KG.
Transparent: Xetra-Gold tracks the price of gold on
a virtually 1:1 basis, and is always up to date.
Tradeable in euros per gram: While in the past, gold was
mainly denominated in US dollars per troy ounce, you trade Xetra-Gold in
euros per gram.
Stable/Constant holdings: The investor’s right to receive
delivery of the certificated amount of gold is not reduced by management
costs or other fees, unlike other investments in gold. 1,000 units of
Xetra-Gold will still represent a kilogram of gold in 30 years’ time.
The company makes the following
promise:
Redemption for gold: Investors always have the
possibility of demanding delivery of the securitised amount of gold per
bearer note against the issuer. If the investor is not able to
exercise this right due to legal restrictions effective for him/her, he/she
can demand the cashing of Xetra-Gold from the issuer. In this case, a
settlement fee of EUR 0.02 per Xetra-Gold bond will be charged.
Delivery of gold: If an investor asserts his/her right to
the delivery of the certificated volume of gold from the issuer, the gold
will be transported to the respective point of delivery by Umicore AG &
Co. KG, which is responsible for all physical delivery processes. The
issuer will also have delivery rights of gold from Umicore AG & Co. KG,
as the gold leaf debtor. Investors can find information on delivery
and the alternative payment claims that are relevant for investment and insurance
companies in the PDF document entitled ‘Information on the process for
exercising Xetra-Gold’.
And yes, Deutsche Bank is involved, as the fund’s Designated
Sponsor.
In other words, Xetra-Gold is an Exchange-Traded Commodity which
differentiates itself by “representing that every gram of gold purchase
electronically is backed by the same amount of physical gold” and its
principal bank is none other than Deutsche Bank.
And with Germans recently rushing
to buy safes or find sound money alternatives in a country where the
interest rate is negative, the ETC, it is not surprising that the population
has flocked to its offering.
According
to recent report by LeapRate, the gold held in custody by Deutsche Borse
Commodities for the purpose of physically backing the Xetra-Gold bond has
risen to a new record high of 90.67 tons, an increase of more than 50% since
the beginning of the year. “For each Xetra-Gold bond, exactly one
gram of gold is deposited in the central vaults for German securities in
Frankfurt” the report parrots the company’s website.
Among all exchange-traded commodities (ETCs) tradable on Xetra, Xetra-Gold
is by far the most successful in terms of turnover. During the first seven
months of the year, order book turnover on Xetra stood at approximately €1.5
billion. The assets managed by Xetra-Gold currently amount to €3.5 billion.
In September 2015, the German Federal Fiscal Court (Bundesfinanzhof) had
ruled that after a minimum holding period, any profits from the sale or
redemption of Xetra-Gold are not subject to the capital gains tax. From a
fiscal point of view, the purchase, redemption or sale are thus to be treated
equal to a direct purchase or sale of physical gold, such as in bullions or
coins.
But what is most notable, is that, as noted above, Xetra-Gold investors are
entitled to the delivery of the certified amount of physical gold at any
time, and adds that “since the introduction of Xetra-Gold in 2007,
investors have exercised this right 900 times, with a total of 4.5 tons of
gold delivered.”
However, something appears to have changed.
As Oliver
Baron reports, those who ask for gold delivery at this moment, “could
encounter difficulties.” The reason is that according to Baron, a
reader of GodmodeTrader “sought physical delivery of his holdings of
Xetra-Gold. For this he approached, as instructed by the
German Borse document, his principal bank, Deutsche Bank.”
At that point then he encountered a big surprise: the Deutsche Bank
account executive informed the investor that “the service”, is no longer
offered, namely exercising physical delivery at Xetra-Gold, for “reasons of
business policy” and therefore the order form provided by Clearstream Banking
AG for exercising Xetra-gold is no longer available.
Baron writes that since Deutsche Bank is no longer serving the physical
exercising of delivery request of Xetra-Gold is remarkable, as Deutsche Bank
is the “designated sponsor” as well as fiscal, principal and redemption agent
of Xetra-Gold according
to its prospectus, and as the explainer of how to exercise
physical delivery also reveals. Even if one is a customer of another
bank, Xetra-Gold should – at least on paper- guarantee delivery by way of
Deutsche Bank, as the Deutsche Borse Commodities GmbH explains in its “process
description for exercising units”
Step-by-step description of exercise
Together with a representative of his principal bank, the investor creates
the transaction and sends it to the principal bank’s custodian with the
relevant process data described above. The custodian in turn
instructs its custodian, stipulating all process-relevant data, until a bank
which is a customer of Clearstream Banking is authorised.
The customer may use the attached exercise form to instruct the
designated sponsor (here Deutsche Bank AG, Frankfurt) to deliver a specified
number of gold bars to the point of delivery. The process is similar
to that for the delivery of physical certificates.
The customer should send the original exercise form to the following
address:
Deutsche Bank AG
“Ausübung Xetra-Gold” CIB-Global Banking
Trust & Securities Services
Grosse Gallusstrasse 10 – 14
60311 Frankfurt am Main
Germany
To transfer the required amount of Xetra-Gold units to the blocked account
of Deutsche Börse Commodities, the customer should also place an FoP
instruction via CASCADE or File Transfer/SWIFT.
Delivery will be initiated if Deutsche Bank receives the securities and
the application form by 10:00 CET. As a rule it takes one to two
weeks to deliver retail gold bars and four days for London Good Delivery gold
bars from date of ordering. As soon as the delivered gold arrives at the point
of delivery, the Xetra-Gold® units are removed and recovered from the
“Ausübungskonto DBCo” (DBCo exercise account).
Due to the provisions of the Money Laundering Act
(Geldwäschegesetz) only the branch of a bank may be used as point of
delivery. Investors expecting a large delivery of gold should
contact their principal bank to discuss the transfer of the gold to the point
of delivery.
The article goes on to note that it was not clear whether the exercise and
physical delivery at other banks is actually still possible. Baron said that
Deutsche Borse Commodities advised to transfer the Xetra-Gold shares in a
cooperative/Raiffeisenbank since physical delivery is allegedly still
possible here. The Deutsche Borse also announced that it is currently
working on the “possibility of delivery regardless of bank branch.” However,
since this process was not described in the prospectus of Xetra-Gold, it
would have to be legally tested, which could take considerable time.
The article’s conclusion: anyone who wants to easily convert their
Xetra-Gold holdings into physical gold – at least for clients of
Deutsche Bank – can do so only by selling their shares, and then
buying gold coins or bars directly elsewhere. Which leads the author to the
logical question: what is the worth of the Xetra-Gold service, which
certifies the right to redeem physical gold, if said delivery is no longer
possible?
In other words, what was supposedly an ETC which promised physical
delivery upon demand, is nothing more than yet another “paper
only” play.
We, on the other hand, have a more focused question: is the inability to
deliver physical gold an incipient issue with Xetra-Gold, or with the
company’s “designated sponor” Deutsche Bank, and if the latter is suddenly
unable to satisfy even the smallest of delivery requests by retail clients,
just how unprecedented is the global physical gold shortage?
