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February 8th, 2023 | 11:52 CET

Banks bet 5,000 tons of gold - explosive power? Deutsche Bank, Alerio Gold, Commerzbank

  • Mining
  • Gold
  • Investments
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Anyone investing in gold is betting on an alternative asset class - the precious metal is seen as a reserve currency in a world dominated by banks and large financial institutions. But as the latest figures show, the role of banks in the gold market may be far greater than thought. In the US alone, more than 5,000t is at stake in bank balance sheets with the potential for dramatic price movements.

time to read: 4 minutes | Author: Nico Popp
ISIN: DEUTSCHE BANK AG NA O.N. | DE0005140008 , Alerio Gold Corp. | CA01450V1040 , COMMERZBANK AG | DE000CBK1001

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    US banks with billions of USD in "paper gold"

    The stocks of the two major German banks, Commerzbank and Deutsche Bank, have performed well in the first few weeks of the year. Only for Deutsche Bank, it went down after the latest quarterly figures. Although the paper appears weakened from the perspective of chart experts, at least the fundamental picture for banks looks positive: interest rates are rising again and giving institutions room to manoeuvre. However, the classic interest business does not seem enough for banks. As figures from the US show, banks there have been intensively involved in the gold market since last year. Banks trade gold primarily in the form of derivatives, such as futures, options or swaps. This "paper gold" securitized physical gold because the volume with which US banks are involved in the gold market is likely to exceed the annual global supply of the precious metal significantly.

    German banks also betting on precious metals

    Data from the US regulator OCC, which oversees the derivatives market, shows that US banks hoarded precious metals derivatives worth nearly USD 400 billion in the third quarter. Most derivatives are likely to relate to gold as an underlying asset. Assuming that the gold share is 80%, US banks would have held paper gold amounting to USD 320 billion. More than USD 200 billion of precious metal derivatives are held by JP Morgan Chase & Co. alone. That is followed by Citigroup (approx. USD 100 billion) and Bank of America (approx. USD 64 billion). Based on prices at the time, this corresponds to a whopping 235.79 million ounces of precious metals or 7,333t. Assuming that the gold content is 80%, that would be 5,866t. Annual gold production is equivalent to about 3,500t of gold per year. The official gold reserves of the USA are valued at a little more than 8,100t gold. What do these figures have to do with the two German banks and the gold market?

    German banks are also involved in the gold market. Deutsche Bank even sought to become a member of the London Bullion Market Association (LBMA) again at the end of 2022. In 2014, Deutsche Bank withdrew from the association, which plays a role in gold pricing, among other things. Market observers see the current efforts as a step toward wanting to get more involved in the gold market again. Customers are also showing greater demand for precious metals than in the past. Commerzbank also has a traditionally strong position in the commodities business and has set itself the goal of growing in wealth management in 2022. Gold is also likely to play a role in this.

    Alerio Gold with new CEO: Active 2023 ahead

    The growing share of gold derivatives on bank balance sheets has the potential to shake up the gold market. While banks claim that derivative transactions are backed by physical holdings, this statement seems hypothetical given the large amounts of paper gold on bank balance sheets. At the latest, when securitized claims for precious metals come due and investors "want to see", buying pressure could also arise on the market for physical gold. All companies that produce gold today and companies with stocks in the ground, such as Alerio Gold, could profit. The Canadian company operates two projects in Guyana, Puruini and Tassawini. Tassawini is already home to 500,000 proven ounces of gold. In 2023, the Company plans to continue drilling as it sees further potential in the geology around the project. The more drilling that is undertaken, the clearer the overall picture will become and the easier it will be to identify deposits along existing trends.

    Guyana has been below the radar of international investors. However, since the country began exporting oil and gas, things have been looking up for the country in northern South America, which is characterized by an Anglo-Saxon legal system, among other things. Since December, there has been a spirit of optimism at Alerio Gold: The new CEO Allan Fabbro is regarded as a financing expert for commodity companies and looked forward to an "active 2023" in his inaugural speech. The share is still trading well below the level of a year ago but is currently building momentum under rising volumes. New momentum from the gold market could also give Alerio Gold a tailwind.

    Having a little gold in the portfolio as a reserve currency makes perfect sense. US banks now provide another argument for tangible gold investments. Those with more than the annual gold production as paper gold on their balance sheets are taking bets. Although the absolute number of derivatives does not have to mean anything yet, the large derivative holdings around precious metals could boost the gold price in the near future. Instead of certificates or ETFs, investors can bet on stocks in the sector in addition to physical holdings. In addition to large producers, which are conservative investments per se but can carry operational risks, smaller gold stocks, such as Alerio Gold, are also a good option for experienced investors.

    Conflict of interest

    Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.

    In addition, Apaton Finance GmbH is active in the context of the preparation and publication of the reporting in paid contractual relationships.

    For this reason, there is a concrete conflict of interest.

    The above information on existing conflicts of interest applies to all types and forms of publication used by Apaton Finance GmbH for publications on companies.

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    Der Autor

    Nico Popp

    At home in Southern Germany, the passionate stock exchange expert has been accompanying the capital markets for about twenty years. With a soft spot for smaller companies, he is constantly on the lookout for exciting investment stories.

    About the author

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