Tuesday, August 08, 2006

Scotiabank, the World's Oldest Gold Dealer

Financial Post, Boyd Erman, 8 August 2006

At the top of Bank of Nova Scotia's red skyscraper in Toronto, a group of salespeople and traders from the bank's ScotiaMocatta precious-metals unit sit in front of blinking terminals buying and selling gold, silver, platinum and palladium all around the world.

Seventy floors below, an underground vault holds stacks of bullion in safekeeping for clients.

Despite its home in the New World, ScotiaMocatta is the world's oldest gold dealer. The firm traces its history back to 17th-century London, where the Mocatta family set up as a bullion dealer to the Bank of England. The Canadian bank bought the business from a British bank in 1997 and has since steadily expanded its precious-metals operations.

"If we are not the largest in the world in the business of physical gold, we are one of the largest," says Barry Wainstein, who runs ScotiaMocatta as well as currency trading operations for Bank of Nova Scotia's securities unit.

ScotiaMocatta is still one of the biggest players in its ancestral home of London, where the majority of the Western world's gold changes hands. The company is one of the select clearing houses that move an average of US$15.4-billion of gold to settle each day's trades. In addition, the company has branches in New York, Dubai, Hong Kong, and India, and just hired its first representative in Shanghai to take advantage of the liberalizing Chinese economy.

So how much gold and silver exactly is ScotiaMocatta responsible for at any one time? "I know that and I can't tell you that because of insurance issues," says Mr. Wainstein with a laugh.

Instead, he sketches out a few figures that illustrate just how big the operation is: it's the conduit for 30% of the gold that comes into India, the largest market for physical gold in the world; it has a similar market share in Italy, the leading jewellery design and manufacturing centre in Europe; and it's one of the largest buyers of metal from South Africa, the world's number one gold producing country.

If you are about to visit the vault of one of the world's dominant gold dealers, you might expect to see a vast steel room stacked with gleaming bars.

Instead, ScotiaMacotta's room has a suspended-tile ceiling, flourescent lighting and walls lined with safes painted a hospital green, giving the place the look of a high-school football team's locker room.

It's not unlike a working warehouse. In the middle, there are pallets of silver bars marked with marker-scrawled tags bearing the names of their owners. Scattered about are packing materials, scales and other instruments, all part of the business of shuffling millions of dollars of gold around the world each day, much of it by armored car and by airplane. There are similar rooms in Scotia facilities around the world.

"[ScotiaMacotta connects] the industrial users and the big investors and the producers of precious metals," Nick Barisheff, president of Bullion Management Services, which runs the $80-million Millenium Bullion Fund. Among the bars stacked in the centre of the Toronto vault are dozens of silver ones belonging to the Millenium fund, which uses ScotiaMocatta as its bullion dealer.

"Because of its size and contacts throughout the world, if we have an order for several hundred million dollars of metal, ScotiaMocatta can deal with it," Mr. Barisheff says.

Even as one of the biggest dealers in the world, precious metals are a niche business for Bank of Nova Scotia. Trading and lending in gold makes money for Scotiabank, but like much in the world of precious metals, figures are hard to come by. The bank does not break out results for ScotiaMocatta, though Mr. Wainstein will allow that the precious metals business has generated record profits four years in a row.

The bank's commitment to the business is increasingly rare, as other banks steadily pull out of precious metals, deeming the business too small or too unrelated to the real money makers of retail or investment banking. N.M. Rothschild and Credit Suisse are among the rivals that have left the business altogether or scaled back.

That's provided an opportunity for ScotiaMocatta, which has been an active shopper as other banks shed assets. Mr. Wainstein is currently looking at a proposal from another competitor that wants out. He's considering expanding into base metals, whose prices have been soaring in recent years.

The outlook for gold is still bullish after its rise beyond US$650 an ounce, Mr. Wainstein says, as there are concerns about a weakening U.S. dollar and rising inflation. A higher price, however, is not necessarily good for business. More expensive gold can suppress demand, as Asian consumers buy less jewellery as investments, and demand for fashion jewellery in the Western world fades. On the other side, a higher gold price increases the value of gold ScotiaMocatta has lent out, adding to interest income.

"We want profitability to be sustained throughout the cycle," Mr. Wainstein says. "Though we do probably make more money when gold goes up than when it goes down."