The troubled bank Deutsche Bank and it’s merge with Germanys other mega bank Commerzbank has been the main point of focus in trading news however there could be more troubling news rising. A German analysis website claims Deutsche Bank was unable to fulfill a gold delivery request that was asked for by it’s client Germany’s Xetra-Gold Service.
But first we need to know what Xetra-Gold is?
The publicly traded company provides investors with an efficient instrument to participate in the performance of the gold market. Some of what makes Xetra-Gold attractive to investors are cost-efficient trading and the right for physical delivery of gold.
Here are some of Xetra-Gold features listed on its site
Cost-efficient trading: No mark-up fee, no transportation or insurance costs such as those incurred when purchasing physical gold. The only fees required is the standard transaction fee that is charged for on-exchange securities trading and 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.
Physically backed: The issuer uses the proceeds from the issue of Xetra-Gold to purchase gold. The physical gold is safely held in custody for the issuer in the Frankfurt vaults of Clearstream Banking AG. In order to facilitate the delivery of physical gold, the issuer simply holds a further limited amount of gold on an unallocated weight account with Umicore AG & Co. KG.
Transparent: Xetra-Gold continually tracks the price of gold on a virtually 1:1 basis, and is always up to date.
Trading in euros per gram: Historically gold was mainly denominated in US dollars per troy ounce, you trade Xetra-Gold in euros per gram.
Stable/Constant holdings: Unlike other investments in gold the investor’s right to receive delivery of the certificated amount of gold is not reduced by management costs or other fees. 1,000 units of Xetra-Gold will still represent a kilogram of gold in 30 years’ time.
Xetra-Gold also goes on to promise that investors always have the possibility of demanding delivery of the securitized amount of gold per bearer note against the issuer.
How is Deutsche Bank is involved? Deutsche Bank is the main fund’s Designated Sponsor.
In simpler terms Xetra-Gold is an Exchange-Traded Commodity and distinguishes 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 the movement of 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 at all surprising that the German population has gathered to its offering.
But what is most notable and attractive, is that, as seen above, all 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. Does this all seem to good to be true?
According to Oliver Baron it could well be. In recent events investors who ask for gold delivery at this moment, “could encounter difficulties.” When baron a reader of Godmode Trader sought physical delivery of his holdings of Xetra-Gold he approached his principal bank, Deutsche Bank as requested and received a surprising answer. The Deutsche Bank account executive informed the investor that “the service”, is no longer offered, namely exercising physical delivery at Xetra-Gold and gave “reasons of business policy” and therefore the order form provided by Clearstream Banking AG for exercising Xetra-gold is no longer available.
We can see that 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. And even if one is a customer of another bank, Xetra-Gold should – at least on paper- guarantee delivery by way of Deutsche Bank.
So what should one do if you are an investor?
Together with a representative of his principal bank, the investor should create the transaction and send it to the principal bank’s custodian with the relevant process data. The custodian in turn instructs its custodian, stipulating all process-relevant data, until a bank which is a customer of Clearstream Banking is authorized.
The customer may use the 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
So to put this in 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 brings us to the logical question: what is the worth of the Xetra-Gold service, which certifies the right to redeem physical gold, if it’s said delivery is no longer possible?
And another question we must ask ourselves is if 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?