Scotiabank's metals business closure could impact daily gold price discovery - analysts
(Kitco News) Turbulent times of first trying to sell, then downsizing its bullion desk, Canadian Bank of Nova Scotia (Scotiabank) (TSX: BNS.TO) now appears to be closing its metals business, according to Reuters.
Reports came to light on Tuesday with Reuters citing two sources familiar with the matter. “Scotia had a global call with all its metals staff and said it was shutting down its metals business,” one source said. “The plan is to unwind the metals business,” said another one.
The goal is to reportedly wind down all existing metals business by the beginning of 2021, the sources added.
The move could mean more challenges for the gold market that has already seen a supply crunch and wide price spreads between spot and futures prices, analysts told Kitco News.
“The Scotiabank shuttering of its metals business is a sign of these historic times of markets upheaval. However, such is not a shock to the metals marketplace that has in recent weeks already seen many companies and mines so severely impacted by the Covid-19 pandemic,” said Kitco’s senior technical analyst Jim Wyckoff.
“From my perspective the Comex futures market has at least temporarily overshadowed the spot, or cash, gold market in terms of accurate daily price discovery, given the significant slowing of spot business and spot market-making. Thus, the gold market from a price perspective will take this news in stride,” Wyckoff noted.
One fear is that spot prices could become less reliable, which could be a a big hit for the gold market that has already been struggling with a wide spread between spot and futures prices due to all the logistical issues connected with all the COVID-19 shutdowns.
“It definitely will have an effect on price discovery. The less big banks that are participating in the metals markets, the less reliable those prices coming out of London will be, which we've already seen has been a problem in the past couple of weeks,” Gainesville Coins precious metals expert Everett Millman told Kitco News on Tuesday.
The problem could be made worse if more banks like this close their bullion businesses, Millman added. “A lot of people are worried that Scotiabank is just going to be the first of many banks right now to kind of exit the metals business. We have to see if there's a domino effect that exacerbates the problem,” he said.
Another area of concern is some disruption on the client inter-phase side, said Kitco Metals global trading director Peter Hug.
“I would imagine Scotia has financing projects/lease agreements, metals accounts for their clients, as well as inventory financing deals with dealers. Scotia, I assume will attempt to sell these deals or handle them to maturity … Clients that may need new credit facilities, with other bullion banks or mines that have financing in place may be a bit nervous and are likely already looking for new options,” Hug said.
The news of Scotiabank winding down its bullion desk might also add pressure to the supply side, said Sprott Inc CEO Peter Grosskopf.
“We were already having a tough time getting the amount of physical that we require. I think it's going to be that much harder,” said Grosskopf. “It's almost the opposite of what's happening in the oil market right now.”
Other analysts said they believe that the nature of the physical market is not going to change.
RBC Wealth Management managing director George Gero said that the spot price was never really reliable because “it is not liquid and it is full cash, there is no margin.”
“Lately I've seen a number of banks move their trading departments or close their trading departments. A lot of it has to do with other things like Brexit. The problem of the traders all having to work remote from home,” Gero added.
The character of investments has also been changing, he noted. “The problem with the trading of the gold is that it's just changed a lot. But it will not affect anything because you have more central bank business and traditionally the central bank business is in the spot market.”
Back in 2017, Scotiabank tried to sell ScotiaMocatta, the world’s oldest gold trader owned by Scotiabank.
Unable to finalize the sale, however, Scotiabank ended up keeping its precious metals trading business but downsizing it at the beginning of 2018.
Only around 15 people currently work in Scotia’s metals business, Reuters said. Seventy-five percent of the employees are on the precious metals side and the rest are on the industrial metals side. Just five years ago, the unit had about 140 employees with offices across the world.
ScotiaMocatta’s history goes all the way back to 1600s when Moses Mocatta partnered with the East India Co. to ship gold to India. The operations were set up in London in 1684. In 1997, Scotiabank acquired Mocatta Bullion by purchasing it from Standard Chartered.