Deutsche Bank has defended the decision to back its new exchange traded commodity (ETC) range with gold as the counterparty, despite growing concern about the policy.

With the exception of physical metal, Deutsche Bank decided to collateralise all of its ETCs with gold instead of equities or bonds, because it believes this is less risky than the other options in the current economic environment.

However, the company has attracted criticism because, according to the prospectus, if it cannot acquire gold or the lease rate exceeds 5 per cent for 20 consecutive days, the gold collateral will be replace with normal financial instruments such as eligible equities and bonds.

Critics say because gold would be needed at times of a severe financial crisis, gold lease rates would be sky high as everyone would want to buy or hold gold. Therefore, it is likely that the collateral won’t be gold when it is most needed.

However, Manooj Mistry, head of UK exchange traded products at DBX Trackers, maintained that gold is ideal during uncertain markets.

He explained, ‘This is unique to these products. Gold is very liquid and is easy to liquidate if required and it is also negatively correlated with market movements. During uncertain times, gold does not go down in value.’

In September 2008, the largest daily difference between gold and the indices tracked by Deutsche Bank showed over 10 per cent differences on occasion, which could pose a risk to the client if no haircut (revaluing of the counterparty asset) is applied.

http://www.whatinvestment.co.uk/making-money/investment-funds/news/1273253/deutsche-defends-gold-decision.thtml