The War on Gold II

Further to my post of 6 May on the book Sutton, A.C., The war on gold, 1977, '76 Press, California, USA, below are some extracts from the book I've made for my personal reference:

Page 59: It is this disciplinary function of gold that is irksome to politicians and managed-economy bureaucrats and academicians. Politicians are always eager to buy votes with promises of perpetual prosperity, and bureaucrats are happy to go along to expand their own empire building.

Page 60: Of course, a market clearing price for gold (assuming a 100 percent cover for all present paper debts), might suggest a price of $800 to $1,000 an ounce. This would be a pleasant windfall for those with the foresight to own gold, but it would mean psychological devastation for those who have built their careers on the philosophy of helping everyone to live at the expense of everyone else. The latter need to conduct and anti-gold crusade for their own self-preservation.

Page 111: Defeat turned to disaster between November 1967 and March 1968, as the U.S. lost a staggering $3.2 billion from its gold stocks. By this time other European central banks followed the French example and told the United States that further defense of the dollar would require U.S. gold; none of theirs would be available. The end came on March 14, 1968, the day the Gold Pool lost 400 tons of gold to private buyers. The loss of 20 percent of the U.S. gold stocks within five months finally galvanized the Treasury into action. At the request of the Federal Reserve Bank and the U.S. Treasury, President Lyndon Johnson asked the Bank of England to close the Gold Pool operation.

Page 122: Certainly, a paper system will not last in open competition with gold and silver coins. It is recognition of Gresham's Law that forces the U.S. Treasury to be vehemently against the issue of any gold coins, even and innocuous gold bicentennial memorial coin. While at the same time the Treasury must keep a damper on the price of gold in the market place.

Page 143: The remaining question is not whether the debt structure will collapse, but when. What do we mean by “collapse”? H.A. Merklein defines collapse as a “combination of unemployment and inflation so rampant that the market ceases to function effectively.” (“Can the U.S. economy collapse?” World Oil, December 1975.) Merklein suggests that, given a 50-percent inflation rate, “public confidence in government issued fiat money tends to break down ... and barter begins to replace the money economy.” According to Merklein's calculations, with a ten-percent unemployment rate, collapse could begin at 30-percent inflation - a figure exceeded by the United Kingdom, Argentina, and Italy in 1975. Even granted the existence of many unknowns, Merklein's evidence does suggest the early 1980s as Doomsday for the United States.

Page 151: It was, in effect, a declaration of bankruptcy. When President Nixon closed the gold window he did not, as he said, demonetize gold. On the contrary, he demonetized the dollar! Regardless of his words, his actions emphasized the premium value of gold over fiat dollars. The propaganda war on gold by the U.S. since 1971 has been designed to prevent this single fact from penetrating the consciousness of the American public. When the real significance of the demonetization of the dollar is fully grasped by Americans, the result will be monetary panic, probably followed by the collapse of the debt pyramid.

Page 153: Then, on December 31, 1974, the United States removed the official ban on gold ownership by U.S. citizens. At the same time it began a massive internal propaganda campaign, with the help of an unquestioning media, against gold holding.

Page 157: The current battle – one the U.S. Treasury must win or go down in disgrace – is to prevent significant numbers of American investors from acting on the paper-gold equation. At all costs the American citizen has to be persuaded that paper dollars are at least equal to, if not better than, gold.

Page 159: The Treasury, the Federal Reserve System, and the Congress are under the illusion that they can decree what is money. They cannot. They can legislate legal tender, but that is not necessarily the same thing. Money is what people and countries will accept in exchange for goods and services. This may, or may not, be paper dollars. Historically, as we have seen, money has been gold, silver, copper, and even iron. These currencies have led to stable monetary systems. Money has also been leather, mulberry leaves, and rice paper; today it is wood pulp and ink and the present debt system. Historically, the latter have been the unstable systems. Why? Because at some point holders of these latter moneys look for something of intrinsic value as a store of wealth, and the find none.

Page 172: In early 1975 only about ten percent of South Africa's gold output was used to mint the Krugerrand, the one-ounce coin that is held mostly by individuals, not central banks, as a hedge against inflation. By the end of 1975, 25 percent of the South African gold production entered the Krugerrand presses. As a result, significantly less gold reached the world bullion market. Test marketing promotion of the Krugerrand in Philadelphia, Houston, and Los Angeles had “staggering” and “incredible” results, according to coin dealers. A major New York advertising agency, Doyle, Dane, and Bernback, was hired by the Krugerrand distributor, Intergold, to promote gold coins directly to the America public, which previously had been exposed soley to the bear-market tactics of the U.S. Government. The response was truly “staggering.” By the end of 1975, Krugerrand sales were running at the rate of 5,000,000 coins annually – an amount equal almost exactly to the total proposed IMG annual sale for 1976.

Page 180: The Treasury plan obviously is to maximize uncertainty in the market to depress price, and it cannot maximize uncertainty by regular sales. It can do so only by random sporadic actions at critical market turns, for example in deflationary periods accompanied by maximum propaganda.

Page 200: The legalization of gold in the United States in 1975 was probably not a withdrawal from coercion but an interim effort to make the propaganda war on gold more credible. History suggests that gold will once again be made illegal in the United States and subject to arbitrary seizure by a police-state apparatus. Looking back over monetary history, we see that gold has always been prominent as a protector of individual sovereignty. Private gold ownership is inconsistent with the aims of dictatorship; a war on gold is a necessary concomitant to centralized political power. Wars and fiat currencies have always gone hand in hand.

Page 203: As we look into the future (in competition with the professional prognosticators), the domestic war on gold looks like this: there will be an increasing realization by the public that the ratio between paper-debt and gold in inexorably shifting in favor of gold. That public confidence is the all-important requirement to keep a paper-debt money system afloat . . . and this confidence is eroding. Surges in confidence-erosion will account for short-run increases in the price of gold, while for intermittent periods the government will regain some public confidence; when this occurs, gold will settle back to its approximate long-run ratio to paper-debt units. At some point, however, there is a distinct probability of panic – if debt holders see the debt pyramid collapsing or even anticipate its collapse. Particularly this will be true if there is general realization that paper assets are actually someone else's debt and are inherently worthless. However, it is important to note a distinction between “realization” and “action.” Investors may “know” the pyramid is illiquid and in danger of collapse; they may not “act” on this knowledge. The herd instinct suggests that only a few will bale out in time; the majority will act in panic, too late.

Open Forum

The Triumvirate of Wealth

Glossary of Acronyms

The death of gold

While I have only been blogging for a short while, I have been following goldbug chatter since 1998 when I took up a position in the Depository division of the Mint. At that time it was all doom and gloom with the price in a downward trend, helped along by Gordon Brown with his auction.

This unheard of method of selling central bank gold (usually it was done on the quiet and announced later) was not endorsed by anyone and really only left two conclusions: either he was stupid or it was a conspiracy. For an example of the latter, see this 25 May 1999 posting by GATA: "A political decision was made by the British to make sure the price of gold did not rise above the key $290 gold carry trade borrowing point of the bullion dealers and to make sure that the price would tank when the first pre-gold sale announcement in more than 20 years was made."

Since that time the the gold price has risen from $250 to $1000, which implies a very unsuccessful manipulation. In some sense this is true. Consider that around 2001/02 the total amount of gold leased out was estimated between 10,000 and 16,000 ounces (see this Golden Sextant commentary) compared to approximately 30,000 oz of central bank holdings. One could conclude the increase in gold from 2002 to 2009 is proof the manipulators ran out of firepower (ie gold to lease to support short selling) over that time.

If indeed central banks have leased all they can, then one would assume that the market is finally poised at the crucial tipping point that the commentators from those early days have been waiting for, where further physical buying that is already in excess of mine and scrap supply will overwhelm supply from short sold leased gold, resulting in a parabolic rise in the gold price as the shorts are broken, scrambling to cover their positions being unable to post sufficient collateral to cover the huge rise in gold.

This is the 1980 spike revisited, but at a much higher inflation adjusted price. How high? There are as many guesses as their are commentators - $2200, $5000 or more? This is the end game that many goldbugs have been waiting for, when they can shout "we won"!

But will they have won? I would argue not. I would argue that such a scenario would actually be the death of gold.

Those who welcome a 1980s spike have lost sight of the real war. There are others who are driven by base greed. They have fallen into the trap of seeing gold as an investment. It is no such thing. It has no power to create wealth - it is an inert thing. It is only the entrepreneur and inventor who create wealth. Hawking gold as an investment is bubble behaviour, no different to the debt fueled bubbles in stocks and real estate. Such people are no friends of gold.

Gold is money. Often stated, but what does it mean? Gold is for storing wealth, not making it. I can only suggest reading Whither Gold? by Antal Fekete if you want to get what I am talking about. Those who understand this understand that the real war is gold as money versus fiat as money. The winner is the one that can demonstrate an ability to store wealth.

One may argue, how can fiat win when it has lost 95% of its value since the Federal Reserve came into power in 1913? This is too broad a sweep of time for the average person. They look only year to year, and single digit inflation looks stable to them. There is some vague understanding that money loses value, but it is not dramatic and anyway, the way to deal with this is to "invest".

To beat gold in this war, all you have to do it make it look unstable. This is why a parabolic rise in the gold price is counterproductive. It makes the average person see gold as a speculative investment, worst still, one that does not pay a dividend. Parallels to 1980 will be drawn, focusing on the bust after that bubble. This does nothing for gold's image as a stable store of wealth.

From this point of view, the theory of suppression of the gold price misses the point. To kill gold you don't manipulate its price, you manipulate its volatility. If gold looks unstable, it is unlikely that a gold standard will ever be accepted.

Therefore, at the one moment in time when people may lose faith in debt based investing as a way to beat inflation and preserve wealth, when they are looking for something else more stable, gold will fail to win them over.

I mentioned earlier about a tipping point. I would like to conclude with one last idea: one other advantage of manipulating volatility rather than price is that your firepower lasts longer. All you need to do is start a trend, or help a trend along. Herd behaviour and chartist momentum will do the rest. Bullish or bearish, it doesn't matter. As long as the price moves wildly, your ends are served. For those that believe in manipulation this thesis means we are not at a tipping point and the manipulation has many more years to run.

Dead End

Credit Restriction

From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations:

Prosperity comes to an end when credit expansion is discontinued. Since the process of expansion, after it has been allowed to gain a certain speed, can be stopped only by a jolt, theere is always the danger that expansion will be not merely stopped but reversed, and will be followed by a process of contraction which is itself cumulative.

If the restriction of credit did not occur, the active phase of the trade cycle could be indefinitely prolonged, at the cost, no doubt, of an indefinite rise of prices and an abandonment of the gold standard.

Well, we abandoned the gold standard, had unrestricted credit, so now we wait for an indefinite rise of prices?

Bookkeeping is more or less based on the assumption of a constant value of money. Periods of major inflations have shown that this tradition is very deeply rooted and that long and disagreeable experiences are necessary to change the habit. One of the consequences is that durable means of production - such as machines and factory buildings - figure in cost accounts at the actual cost of acquisition, and are written off on that basis. If prices rise, this procedure is illegitimate. The enhanced replacement cost should be substituted for the original cost of acquisition. This, however, is not done, or is done only to an insufficient extent and only after prices have risen considerably. The consequence is that too little is written off, paper profits appear, and the entrepreneur is temptted to increase his consumption. Capital in such case is treated as income.

The paper profits are also likely to add to the cumulative force of the upswing, because they stimulate borrowers and lenders to borrow and lend more. The foster the optimistic spirit prevailing during the upswing, and so the credit expansion is likely to be accelerated. This phenomenon has its exact counterpart during the downswing of the cycle.

Those interested in the above may also find Professor Fekete's paper Is Our Accounting System Flawed? of interest.

Metal Accounting I

This article discusses the issues associated with keeping track of precious metals. I call it metal accounting because the point is to ensure that ounce debits (ie assets) always equals ounce credits (ie liabilities). This should be of interest to anyone holding unallocated metal because the extent that your "custodian" doesn't have control over their metal activities is the extent that your holding is not backed and thus the custodian is exposed to precious metal prices. If this exposure is excessive, and the price rises, they go bankrupt.

I put custodian in inverted commas because unallocated metal, even if backed 100% by physical, is not the same as a true custodial service, commonly referred to as allocated metal. With allocated, you hold title to the physical metal and the storer is just a safekeeper of your metal. It is off the balance sheet of the storer and control of it is a very simple process: run listing of how many bars your are holding for a client, do a count of the bars in the vault, the two should equal.

Unallocated metal, on the other hand, is on the balance sheet of the storer. This is why it is so important that debits equal credits, from an ounce point of view. At first you may think that the controls around keeping track of allocated should apply to unallocated - if you owe 100oz to clients, then you should have 100oz of physical gold on site. What this article hopefully reveals is that it is not necessarily that simple and an appreciation of the need for stronger controls.

The Golden Table

Let me start with an imperfect analogy for the manufacture of precious metal products: making a wood table. Looking at your plans, you go down to the hardware store and buy some wood and nails, say it costs $100 all up. It is not likely that you will get the exact lengths you need, so some sawing is involved. Whack a few nails in and you have your table.

If I asked you what the table cost, you look at me strangely and say $100 and wonder why I was so stupid. Your answer, however, has made one assumption: that your "by-products" of the table making process are worthless. What are these by-products? They are the wood offcuts and sawdust and your assumption is most likely correct.

Now consider that you are making the same table out of gold. Lets assume the same $100 purchasing cost for the raw gold (it would have to be a really small table) and same process - you have to cut up the gold planks. When I asked what the cost was, would you still say $100? Of course not, you aren't going to sweep up the golddust and throw it and the gold offcuts in the bin like you would with the wood. You would melt them down and sell them to a refinery and the money you would get back would reduce the initial cost of $100. It is like the hardware store giving you a refund for the wood offcuts and sawdust.

This is what makes precious metal manufacture different from normal manufacture and is a function of the high value of precious metals and the fact that you can melt the by-products and reuse them without any or much loss of "utility". My first exposure to this was when I looked at a stocktake count summary and saw a line called "sweeps". It was literally the amount of gold after refining from the sweepings from the factory floor. That plus the fact that the counts were done down to 1/1000th of an ounce that was my first indication that this minting business was just a little bit different.

The existence of by-products introduces our first complication in precious metal control - estimations. To help illustrate the issue, let us first complicate our gold table process. As your local hardware store doesn't sell gold planks, you have to buy standard size gold bars from your local refinery. You therefore have to melt them and pour them into a mould for the legs of your table.

To melt and pour gold, you have to heat it to above its melting point. The reason for this is that gold cools very quickly and if it is just at its melting point it will go solid before you can finishing pouring it. However, this creates a problem because when something is above its melting point (but not yet at its boiling point), some of the liquid is evaporating. Now you might think how much gold would really evaporate and I don't know the technical answer to that. But what I do know is that it must be enough because above any gold furnace I've seen there is a hood that sucks in the fumes, taking it to a "scrubber" that collects the gold particles. However much gold is evaporated, it must be worth enough to go to all that trouble. Consider also that the crucibles in which the gold bars are melted also, over time, absorb amounts of gold.

Estimations

So how do you do a precious metals stocktake? First step is working out your "theoretical" or book inventory. Say you received 100oz of raw gold and recorded shipments of 90oz of coins. 100 minus 90 equals 10oz. Second step seems simple enough, go around and count all the physical gold and it should add up to 10oz. Easy.

OK, lets say there are 5 x 1oz finished coins on the shelves and 3 ounces of "offcuts". But what about the gold in the sweeps, embedded in the crucibles, in the scrubbers? This is where one has to estimate the gold that is onsite, but not measurable - for example you don't want to crush up and refine your perfectly good crucibles just because it happens to be a stocktake date. Introducing estimations, however, introduces room for human error. This is minimised by keeping historical records of the usual gold recovery from spent crucibles, scrubbers etc, so that there is a reasonable basis or justification for the estimated "onsite but not measurable" gold. Lets say this is worked out to be 1 ounce.

We are still missing 1 ounce. At this point consider that not all "recovery" controls are 100% effective. Scrubbers still let some gold evaporated gold out, for example. I've only described a few of the many recovery type controls in a precious metal factory, there are many more and over high volumes of manufacture bits of gold can be lost. The use of the word "loss" is often interpreted as "theft" but it is more accurately described as a "production" loss. It is a sort of known unknown. But this is not really fair, because production managers, again from historical stocktakes, know that there is a certain ratio of production losses to volume manufactured, which enables them to calculate and expected production loss.

Lets say in our example that the production loss ratio is 1% (our production manager would get fired if that was an actual loss). The estimate loss is therefore 0.950oz (1% of 95 coins made). This leaves us with a stocktake result of 5+3+1+0.95 = 9.950oz against theoretical or book inventory of 10oz. What happened to the 0.050oz? In a precious metals stocktake this is the key question.

First thing that is looked at is the accuracy of the count of measurable/countable physical gold. Second the production manager reviews the by-product estimations. If these two look OK, then third is to consider the effectiveness of the recovery controls. For example, maybe there was a hole in the ducting to the scrubbers and thus more gold was lost to evaporation. If controls are OK then it only leaves two possibilities:

1. Your production loss ratio is not correct. Maybe for every 95 coins made you lose 1oz?
2. Maybe your production loss ratio is correct. Therefore, someone in the factory has managed to secrete 0.001oz out every week over the past year.

The problem is that it is not easy to answer the question, because the stocktake result relies on estimations. This is why mints have one other "recovery" control - physical metal detection of staff as they leave the factory!

The above discussion is simplified, of course. There are many more processes involved in a refinery or mint and many more opportunities for production losses, necessitating many more controls. This is where accurate historical records and experienced staff come in to keep account of precious metal.

There is one thing we have missed. In our example, we only have 9oz in physical metal. Whether the 1oz is 0.95oz of production losses and 0.05oz of theft, or 1oz of production loss, doesn't change the fact that we have lost 1oz. If the 10oz book inventory was funded/acquired from clients holding unallocated with us, then we only have 9oz of physical against 10oz of liabilities.

This is why this article was titled Metal Accounting I. In Metal Accounting II, we will discuss how the 1oz loss is dealt with and introduce yet more opportunities for gold to get lost.

Silver Smoking Guns

This recent post (well delayed for those not subscribing to Tom Szabo's Metal Augmentor) is the sort of quality analysis that I wish many of the so-called silver experts would do. Worth reading.

For those pressed for time, some excerpts:

What if, instead, we studied the Bank Participation Report under the assumption that it is NOT a smoking gun? Can we then find some use in it? I humbly offer one hypothesis.

Let’s go out on a limb and suppose that the increase in the COMEX silver short futures positions by the U.S. banks did not directly cause the price of silver to fall. This is actually pretty easy to do since the short futures positions were put on before the price of silver actually fell.

If the short futures position of the U.S. banks didn’t cause the price of silver to fall, which is obviously true, perhaps the same market conditions that did cause the price of silver to fall also resulted in the banks establishing the large short futures position. How would that work?

To answer the question, we obviously need to look at the market conditions that prevailed during the relevant time frame. And because we have hypothetically eliminated the “smoking gun thesis”, we must now substitute bona fide market forces for the price manipulation that is alleged to have caused the price of silver to decline precipitously.

... if the banks are still holding their COMEX short positions as hedges against loan collateral in the form of physical silver and gold, that could represent a dangerous overhang to the market. It is especially troubling that the loans have not been paid back in almost a year. Another squeeze in liquidity could cause more defaults that would force the banks to sell the silver and gold collateral. One possible early manifestation of this would be a sudden jump in the contango especially as measured by the LBMA silver forward rates.

... I’ll just note that while we’ve had quite a climb in the silver forward rates since the mild backwardation in the shorter maturities earlier this year, we haven’t reached the critical point. In my estimation, the critical point would be reached if the normalized forward rate (after removing the effect of interest) climbs above the historical average. This is something to watch closely while the bank participation in COMEX silver futures remains so large and so short, and I intend to do just that.

Australian yield curve and mortgage rates

Below is a short commentary on mortgage rates I received from Jackarine Ludwig of Aggregated Awareness:

The Mystery Behind the Parabolic Yield Curve is a nice report by Gary Dorsch, an American chartist I follow. Rarely does Australia get a mention in his reports. It is good that he's done so now. His charts a good, because they tie in with political & economic events.

Although I don't see the rise in the Australian yield curve as a mystery. And whether Wayne Swan wishes to call it the fault of the 'bond vigilantes' in the US Debt markets or not is irrevelent. Fact is, China is the biggest foreign holder of bonds, both from the US and elsewhere, including Australia. It is obvious that they are the 'bond vigilantes' which Swan refers to.

Regardless, it makes perfect sense from a fundamental supply/demand equation, that more supply would reduce prices, so I don't know what Swan is complaining about? Under his, Ken Henry's & Kevin Rudd's command, the Treasury is going into record setting hock mode for the foreseeable future. By 2012, this government has projected a total deficit of A$300 billion. You read that right, that's billion with a B. What did he reckon was going to happen? Bond Prices to rise & yields fall when he was getting involved in issuing more bonds? HaHaHaHa...What a fool. It is obvious to anyone with a brain, that more Australian bond supply would reduce bond prices & subsequently increase yields. Nothing conspiratorial there Mr. Swan.

If you wish to follow the short & long end bond yields of Australia, US & UK, may I suggest this site. It is updated daily.

Now if you didn't think bond yields are important, then you have obviously never borrowed any money or paid any taxes. If you have borrowed money or paid taxes, then I can say that the yields on 3 year Aussie Treasury bonds, sets the mortgage rate for 3 year adjustable rate mortgages, and the 10 year Aussie Treasury bond sets the rate for longer term mortgages, the 7 year, 10 year or 15 year fixed rate mortgages. And these yields are the interest paid by your tax dollars toward those creditors who have purchased these bonds, both domestic & foreign.

For mortgages, the normal rule of thumb is that banks add 2.5% to the price of these bonds to come up with the mortgage rates. Although lately, because of the rising bond yield, and the fact that it's politically unpalatable to raise home loan rates at the moment, the banks have been copping the bond rate increases and not passing it onto retail borrowers. Therefore, in the past month, banks have not been adding 2.5% to bond yields to calculate their mortgages, but more like 1.7% for the 15 & 10 year fixed mortgages. But I read a story yesterday that said that CBA were looking at raising rates again, but having just gone to their site we can see that they haven't raise them yet.

I received this commentary on Friday and now a number of Aussie banks have moved their rates up in between RBA moves, which is unusual. Maybe the first indication to the average Joe that the Government is not some all powerful economic lever puller who can make it all OK?

What if?

AUD Gold Scatter Graph

Just one of the many fun charts you can produce from the Perth Mint's historical data.

Open Forum

Canadian Mint - $20m loss?

Extracts from the Ottawa Citizen 9 June:

On government orders, the Royal Canadian Mint has called for a criminal probe into as much as $20 million in unaccounted-for gold and precious metals at its Sussex Drive headquarters.

The looming police investigation comes eight months after the Crown corporation first learned it had lost track of the riches last October. It didn’t inform the government until the Citizen revealed the mystery last week.

An internal “precious metals reconciliation” project was initiated by the Mint last fall. In March, with that reckoning apparently no nearer to finding answers, an external audit was commissioned. Its findings are expected next week.

From the Ottawa Citizen 6 June:

NDP MP Pat Martin, representing Winnipeg Centre and vice-chair of the Commons' government operations committee, believes four months should have been ample time for the external audit to find an auditing or accounting problem.

Still, Martin thinks theft is the least likely explanation for the unaccounted gold.

"Given the sheer volume of activity lately, there could be some slippage and line loss in the processes. There could be some maladministration with the accounting systems and, in the worst-case scenario, somebody's figured out a way to slip some precious metals out of there, but that's the least likely of the three," he said.

Knowing the issues involved in precious metals reconciliations, I am doubtful that the police are going to be able to do any better unless the Mint has specific evidence/reasons of theft. I'll discuss why in my next blog.

The Bermuda Triangle of Currency

Canadian Mint missing gold- what is really going on?

In the past week it has been reported that the Royal Canadian Mint (RCM) has “lost gold”. The reports contain statements that to the lay reader may seem unremarkable, but which to me give an indication of what is really going on.

It is also a story of particular interest to me not just because I work in a Mint, but because one job (of the many) I held at the Perth Mint was that of Metal Accountant. The Mint is so obsessive about metal control that it developed four parallel metal general ledgers (au, ag, pt, & pd) and employs a Metal Account full time on ensuring debits equal credits down to one thousandth of an ounce.

My experience in this area is also why I get annoyed at the Jason Hommels who make unsubstantiated claims that the Perth Mint is short gold and/or runs a fractional Depository – for many years it was my job to make sure metal liabilities were backed by metal assets. Anyway, enough of my gripes. For those who haven't seen the reports, below are the key “facts”, with each number hyperlinked backed to the source of the quote.

1. a significant quantity of gold, silver and other precious metals is unaccounted for.
2. The Royal Canadian Mint is withholding employee bonus pay as special auditors enter a fourth month hunting for unaccounted gold insiders say could be worth as much as several million dollars.
3. In recent years, the mint has become a rich source of cash for the government, generating net income of $21.6 million in 2007 on record revenue of $632 million.
4. external auditors have been working since early March to reconcile the precious metals discrepancy, apparently without success. Even retired mint staff have been quietly brought into the Sussex Drive plant on weekends to try solve the discrepancy, according to a source.
5. external auditors are investigating a discrepancy between the mint's 2008 financial accounting of its precious metals holdings and the physical stockpile.
6. possibilities from sloppy bookkeeping to a gold heist.
7. “An unprecedented demand in gold in 2008 has led to an unreconciled difference between the mint's financial statements and the physical count of precious metals. There's a difference there that we're looking into."
8. Officials will only say the discrepancy may be related to an unprecedented demand for gold in 2008, including a 352-per-cent surge in production of its popular Gold Maple Leaf coins.
9. She said an unprecedented demand for gold in 2008 put pressure on the mint's internal control systems, which led to the "unreconciled difference" between the gold on hand and the value recorded in the mint's books.
10. “includes the analysis of precious metal by-products and financial data"
11. "We're looking at many different angles right now,"
12. would not say whether the gold and other metals in question were part of the refinery and bullion operation or one of the mint's three other business lines.
13. It's not known when or what triggered the audit review or what external auditor is conducting the review.
14. The corporation's fiscal 2008 runs from Jan. 1 to Dec. 31 and its normal external auditor is the Auditor General of Canada, who is required to audit the mint's year-end consolidated financial statements.
15. “Doing business with the mint is still safe and this review will likely give us some suggestions on how to improve our processes.”
16. Notably absent, however, is any expression of optimism the affair will turn out to be a case of sloppy bookkeeping or another accounting mix-up. Asked this week to acknowledge the mint is fairly confident the unaccounted for gold has not been stolen, Aquino replied: "We really want to wait for the review before we make any conclusions. We don't want to come to any conclusion until then."
17. police have not been called into what mint officials considered an internal matter.

Firstly, exactly how many millions is “significant”? External auditors have a lot of things to check when reviewing accounting records, so they focus on those that will have a material effect. Accounting standards say that if an item will affect profit by 10% then it is clearly material, with 5% a sort of bottom cut off. If RCM made $21m in 2007, and had a 352% increase in Maple sales, then I think conservatively we could assume they will make $40m this year. This means that the “discrepancy” must be at least $2m, if not $4m. That's a fair amount of gold, or silver.

The second thing of interest is that the external auditors have been working on the problem since early March. What is interesting about this statement is that if the RCM had process problems (#15) and pressure on their internal controls (#9) as a result of increases in volumes (#8), then discrepancies would have starting being evident during 2008. I find it hard to believe they would just have found out about it at the 31 Dec stocktake.

The Perth Mint, for example, performs quarterly physical stocktakes and metal reconciliations. If there were process/control problems, abnormal variations would show up well before year end, prompting investigations. That is the point of doing it quarterly, so there are no surprises come year end.

I suspect that they only started reconciling book records to the stocktake result mid Jan (holidays etc), I can that taking a month or so. Come late Feb they realise they have a problem, do some more work on it but the external auditors are around then doing their usual stuff and they can't resolve it so mid-Mar the auditors become aware of the problem. It would also not surprise me that considering the size of the problem, one response would be to question the stocktake result, leading to another stocktake at the end of March.

Why one could question a stocktake (if your inventory records say 10 widgets in stock then you either have 10 or not, don't you?), how one would not know for certain if gold had been stolen, how one could have a “discrepancy”, why the need for retired workers and what would they have to offer, and why it would take so long to solve the problem requires us to delve into the esoteric world of precious metal manufacture, by-products, and giveaway. In short, stocktaking precious metals is not a straightforward counting of gold widgets – it involves estimations, hence the potential for accounting process stuffups. This I will discuss in my next blog.

Boiler Room III - The Deal

After much anticipation, I received my call. It was a bit of a let down as it wasn't a scam, all the pre-screening was part of a telemarketing campaign for gold options trading for a Japanese commodity broker - www.ftpfutures.com.

The pitch was that gold was directly related to the US dollar, which was obviously going to be going down with inflationary money printing so "gold would go through the roof". Wasn't any mention of risk, but then I did hurry the pitch along because I wanted to cut to the chase to see if there was some sort of Nigerian requirement for me to make a facilitation payment or some such.

Looking at their website I don't think the unsoliticited telemarketing approach using contact details harvested from the net sits well with the image they are trying to project, but it is obviously working. I suppose that is a good sign for gold as 10 years ago I remember how hard it was getting anyone interested in gold.

Like an Arab Sheikh

Boiler Room II

Further to this post, I had my follow up call from the Hong Kong boiler room operation today, after I thought I had lost it. A different person to the first call, not much more information just saying that their senior advisor would call me about "information on the gold market". Looking forward to seeing what the deal is.