For years and years people have worried that ETF’s (exchange traded funds) and ETC’s (exchange traded commodities) blowing up to a lack of physical commodity backed behind could be one of the next triggers for a crisis. How do you prove that issuers of these paper securities really are buying and storing the underlying securities on your behalf so that you can genuinely call delivery of them when you want.
Today was the first sign that maybe some of these fears are justified. Zerohedge reported yesterday that DB refused a client delivery of an ETC that was… supposed to deliver on request..
Deutsche Bank was unable to satisfy a gold delivery request when asked to do so by a client of Germany’s Xetra-Gold service.
Zerohedge then provided a description of what the Xetra-gold service was supposed to provide as well as transparency, cost efficiency, etc. To highlight the most important part;
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.
Physically backed is the key phrase there.. .and on the redemption side, ease of redeeming and delivery of physical…. which is of course why you would enter into an agreement like this in the first place;
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’.
It seems however, that a customer of Deutsche Bank (one of the fund’s designated sponsors) has found out the difficult way that in fact, iti s not possible to redeem for gold. At least if buying the fund via Deutsche Bank this is no longer possible. In fact, you would have to liquidate your ETC fund to cash, and then buy physical gold elsewhere if you wanted such exposure. Which leaves you wondering (as zero hedge points out)… why on earth would you buy a paper play that promises physical delivery on demand, when it doesn’t????
And how far does this problem persist? Is it limited to Deutsche or do customers of Xetra gold face the same fate?
It may be worth considering now the value proposition of companies such as Digix which are working hard to collateralise gold on the blockchain through a secure and sophisticated system which should ensure problems like this in future.
Through systems like the one Digix has created, ownership of gold is published on the blockchain and stored securely on behalf of the owner. Rather than one centralised institution telling you ‘sorry, you can’t have your gold’, the system relies on reaching a decentralised consensus as to your rights.
Digix has also created a ‘proof of asset’ system which is a unique way of proving you own something.