Can US Govt seize Perth Mint client gold?

You may be interested in my response to this comment left in the Permanent Portfolio Discussion Forum:

"Perth is good, but I trust Australia less than Uncle Sam. ... If I put my assets in Australia, I not only need to worry about Australia's government seizing my assets in times of their need... but I also have to worry about the US State Departments ability to basically extradite the assets back (and me personally) to the United States under the guise of fraudulent transfer or tax evasion when Uncle Sam is in need."

 

It in I discuss the one occurance we have had of a request by US authorities for a client's gold to be handed over to a US court.

 

Unrelated - this is my new favourite blog Paper Money Shield who's mission is "Defending paper money from the rigorous attacks of precious metal advocates."

Shortage followup questions

Some good questions from a thread on my shortage interview at silverstackers.com forum, cut and paste below:

Bron

In that interview I was sort of covering the material in this discussion.

The summary text "invest large amounts of capital towards ramping up production" I think got mixed up, what I was saying was WHILE production has been expanded, it is not enough.

When push comes to shove, Depository clients will get preferential supply for collection requests as we have a legal obligation to make delivery whereas we don't have a legal obligation to sell coins to someone off the street, so to speak.

Gino

And yet, even though there were two month delivery lead times, it didn't move the price of silver at all in 2008/09. there was no price spike to reflect the demand pressures in the investment market and the apparently constrained supply. It was very interesting as an investor participating and not at all what one would expect. But then the reason was it wasn't the raw material that was in short supply, only the blanks for coins. Although I recall delays on bars as well.

So is the point here that there may be physical delays, but don't necessarily interpret that as a resource availability issue? But if the price does move, what would it mean? Does the price just come down to the paper markets and the manipulations of it by TPTB?

Bron

The thing about rationing or high premiums is that it takes pressure off the underlying wholesale market. For example if people are paying 40% premiums for silver coins when the normal is 10% premium, then $30 out of every $140 spent is going to retailers/mints as extra profits rather than buying more silver. If mints were able to keep up then of that $140, $130 would be going to buying (or bidding up the price) of silver.

Excess premiums, whether it is in coins or say PSLV, just means less ounces are being bought. That is why I don't think high premiums are anything to celebrate.

The price is driven by both the physical market and paper market, which is more dominant changes over time.

southerncross

Would you not agree tho that paper is the dominant market? Say for example just as a thought exercise that just silver alone was for some unexpected reason deemed only acceptable in it's physical form as a means of trade and that all the phantom paper Silver disappeared overnight due to some sort of black swan event.

People who have an PMDS for example cant just pick up the phone and buy X amount instantly and those sorts with unallocated accounts etc cant just use their phone to "say" they actually own it, they have to physically produce it.

Bron

Certainly paper often has the upper hand, but many desk-based commentators who aren't in the markets don't realise how much physical is also traded. Blogger FOFOA has a theory that since bullion bank unallocated accounts are fractionally backed bullion bankers are particularly concerned when the physical market starts to suck out metal, draining their reserves (which if left unchecked could take too much physical and result in a bullion bank run). His theory is they push the price UP (not down) as that means the same dollars buy LESS ounces, taking pressure off their reserves. I hope this gives one example of how complex the physical vs paper dynamics can be.

Not sure I understand your point about PMDS. If we went to a physical only market then we would only sell to a PMDS client if we could get/had physical silver.

southerncross

Now I know it's a far flung what if and an extreme example, and I am not by any means saying that the Perth Mint itself is selling more Silver on paper than what it physically holds, but there are many examples around the world of paper precious metals magically teleporting from or too certain vaults with nothing more than the push of a keyboard and a few typed lines of evidence to say that they actually exist. Literally millions of ounces that would need a convoy of armoured car's and associated security personnel to transport that don't actually happen in the real physical world.

Bron

It is a common misunderstanding that the ETF allocations involve physical movement. As most of them store their metal in London, all that is happening is that silver already in the vault (which belonged to someone else who sold it to a bullion bank) is just sold to the ETF authorised participant and they just change a computer record saying that bar in the vault now belongs to the ETF AP (who then transfers title to the ETF trust).

southerncross

Q: Would you as a personal investor in precious metals trust anyone else apart from the Perth Mint if you invested solely in paper or unallocated Precious Metals ?

Bron

It all comes down to the custodian. You either trust them or not. If you don't then not even allocated will be safe. Regarding unallocated, I don't think apart from ourselves and Kitco that there are many who explicitly state that their unallocated is 100% backed, and that is really only possible for businesses which have physical as part of their business. If you are buying unallocated from a bank, then very high chance it is being lent in some form as that is what banks do.

southerncross

Sorry Bron two questions actually, And this one go's back to the statement I quoted of yours above. Q: Do you think the paper market is manipulated by able bodied self interested parties? Again I ask this with no reflection on the Perth Mint as they are not a Bank or associated with the rise and fall of the stock market etc just on your statement on the physical and paper market.

Bron

I would not be surprised if the metals markets are manipulated, but as we are not traders in the big paper markets (eg COMEX) we don't have any evidence one way or the other. However I don't believe the metals markets are suppressed, which I distinguish from manipulation (which is short term). Suppressed means the price is kept lower over a number of years. Those who think this way don't appreciate (or is that respect) the power of the physical market, by which I mean to suppress you ultimately have to supply physical to the market and there is only so much above ground in the hands of the central bankers.

Black_Sun

Yes, all metal is NOT held physically at PM... all explained in goldchat.

Bron

To clarify, unallocated is backed by physical in our operations in Perth, but also by some physical in transit and temporarily sitting in overseas warehouses on its way to distributors, and by a bit of unallocated held with bullion banks (which is converted to physical on a regular basis). If you're not comfortable with the unallocated business model then go with allocated. 85% of Depository clients (by ounces) hold unallocated, the rest allocated.

Matthew 26:14

"Bron Suchecki, who's in charge of strategy for the famed Perth Mint, is warning all precious metals investors that the next crisis will lead to heightened precious metals demand so expect shortages and mint rationing. This is exactly what happened in 2008, and the next crisis could very well be worse." Curious statement. In 2008 the ass fell out of silver while there was a supposed physical shortage? Defies logic and economic norms.

Bron

You're confused because you're not using precise terminology. Restated: "In 2008 the ass fell out of silver due to selling by leveraged paper players needing cash to pay for other losses, while there was a physical shortage of RETAIL sized coins and bars." In fact, the leveraged paper selling, because of arbitrage, would have resulted in associated physical wholesale sized silver (ie 1000oz) bars coming into the market. This is why we didn't have any problem getting hold of 1000oz bars out of London during 2008 even while we were maxed out in the factory making coins.

Financial Survival Network

Been a busy boy this week, click here for my interview with Kerry Lutz. Starts off with questions about the Perth Mint and the Certificate Program, but he hits me up with a question on price maniplation at the end where I distinguish between manipulation and supression.

Also, a very good post by Warren at Screwtapefiles blog on his favourite topic of social media manipulation in the precious metals space. His chart on flowchart of how the metals market works is also a classic.

Has Gold's Uptrend Been Broken?

I have a post up on the corporate blog featuring a Sharelynx log chart of the gold price.

There is also a very good video of why gold was (is?) favoured as money over other elements/metals in this post The Science Of Gold

And in response to this cheeky question from JR re that post "Is the Perth Mint claiming that gold is money due to its unaltering quality!?", the answer is No. The "What others are thinking" category on the corporate blog is for non official views and maybe the wording "gold is all but unrivalled as the outstanding candidate for money" could have been a bit more qualified in retrospect. :)

One Tonne Coin

It has been killing me having to keep this under wraps www.1tonnegoldcoin.com

The idea was conceived by Acumen Design as part of their pitch to win the contract to renovate our shop and exhibition. I ran that project until recently and I loved the idea but it was considered impossible (maybe because I wanted it to be 3 tonnes, which would have given it about 1.5m or 5ft diameter). It was our CEO, Ed Harbuz who really got behind it and challenged our guys to work out how to do it, saying that if the Egyptians could make Tutankhamun's gold coffin then surely we could do the same with modern technology.

A few trial runs were made in smaller sizes to get the right mold material and to solve problems dealing with that much molten metal, eg thermal shock. My favorite part of the making video is using a router to cut in the milled edge serrations - if you ever want to "work" pure gold apparently normal wood router bits work just fine.

A silly indulgence to out do the Canadian Mint? Probably, but it will generate some nice publicity and draw tourists to our exhibition and shop so we'll recover the cost of fabrication in time.

Closing Unallocated

In the entire time I have worked in the Depository business (since 1998) through the many times I have explained our unallocated "business model", the one thing that has surprised me is no one asked a very simple question, a question that cuts to the core and would reveal whether the Perth Mint had any integrity and whether we were lying about unallocated:

"So if it is funding working inventory, you will have to close it at some point, yes?"

That point has been reached with silver as announced on the corporate blog. Gold will follow in due course, possibly quite quickly once people realise the best storage deal in the world cannot continue forever.

You would not be surprised to know that our Certificate Approved Dealers were not overly happy about it - which business wants to stop selling its best product line - but it could not go on forever.

Of course the move has raised questions, and I'm currently managing four discussions on it (Ed Steer, Kitco, Gold is Money, SilverStackers).

This move should now raise another important question, but I'm not going to wait in case no one asks it:

"So if the West Australian Government is on the hook for the Perth Mint, surely there is a limit to how much they can guarantee, so therefore a limit to Depository?"

Answer is yes, at some point Depository will also close Pool Allocated and Allocated. When is an open question depending on how fast metal flows in and what happens to the gold price. But the day will come. The Government does not have the financial capacity or willingness to guarantee massive precious metal liabilities.

This suits me fine and should suit our clients, as the bigger you are the bigger the target - theft and political.

Many people just don't get this about the Perth Mint. It is not some money hungry management team looking to take on leverage and grow for the sake of growing and bonuses. It is conservative and about looking out for the interests of its clients. When we end up closing the whole Depository business to new clients, maybe the message will get through. Problem is it will be too late for some.

PS - an excellent analysis and history of the Liberty dollar case.

Coin & bar sizes

Below is a doc with actual (approximate) sizes of the Perth Mint's coins and bars. Consider that these coins and bars, which fit on an A3 page, are worth over $200,000. A great example of the "value density" of gold.

Perth Mint coin/bar sizes

What happens if Perth Mint becomes insolvent?

Perth Mint Depository was recently asked the question below and I thought you may find my answer of interest.

“Should Perth Mint become insolvent, for whatever reason, do clients receive gold or cash? Also, what is their seniority in terms of the Mint's liabilities?”

The usual definition of insolvency means cash flow insolvency, that is, unable to pay debts as they fall due. In that sense the Perth Mint itself can never be insolvent, because it can always borrow funds from its 100% shareholder, the Government of Western Australia. When one asks what happens if the Perth Mint is insolvent, one is really asking what happens when the Government is insolvent, which is really another question.

As Wikipedia says, “a government cannot be insolvent in the normal sense of the word. Generally, a government's debt is not secured by the assets of the government, but by its ability to levy taxes.” The question the client asked was flawed in the sense that it was trying to analyse/assess the Perth Mint as if it was a distinct corporate entity standing on its own. While it is a commercially focused entity, it is nonetheless an extension of the Government and as section 4(3) of the Gold Corporation Act 1987 says “is an agent of the Crown in right of the State and enjoys the status, immunities and privileges of the Crown, except as otherwise prescribed.”

Having dealt with the cash flow issue, there is still the case of a balance sheet insolvency, a nice way of saying the Mint has lost the gold “for whatever reason”. Now the reason is important because if it is theft, then the Mint will first go to Lloyds to claim on its insurance policy. Only if they fail to pay does the Mint have a problem.

An alternative reason is that unknown to Government, the Mint never bought gold with the money clients gave it, in other words went short the gold price. In this case we are talking about fraud as that is contra to what they say they do "The Mint purchases an ounce of precious metal from the spot market for every unallocated ounce it sells to clients. Accordingly every unallocated ounce is 100% backed". The idea the Mint would want to keep client cash and not buy gold is one I consider lacking in any commonsense, as discussed in this blog.

Anyway, lets assume a shortfall in gold to back Depository liabilities. If the loss is small, the Mint would book the loss and if larger than cash reserves, would borrow the necessary remaining money from the Government to buy the replacement gold.

However, if we were talking about a huge loss, say $500 million, then one isn't going to be able to sneak through a loan from the West Australian Treasury. In that case Clause 22(1) of the Gold Corporation Act 1987 is invoked, which states that "The payment of the cash equivalent of gold due, payable and deliverable by Gold Corporation, the Mint or GoldCorp under this Act and all moneys due and payable by Gold Corporation ... is guaranteed by the Treasurer, in the name and on behalf of the Crown in right of the State." This put the Government on the hook for any loss at the Mint.

Now the interesting wording is "cash equivalent", which gets to the rub of the client's question. This wording, I guess, was put in because a government's power to tax can only be in terms of money, therefore its obligations have to be expressed in monetary terms.

In practice what would occur is that the Mint would, as soon as it knew about the loss, work out the market value of the lost gold, request that "cash equivalent" from the Government, and immediately buy the replacement gold. The end effect is that the client would receive gold, not cash.

As to whether the Mint would be able to obtain sufficient gold, consider that it refines around 300 tonnes per year, say $13 billion. Total Depository liabilities are a bit over $2 billion (which is not all gold). Either way no problem getting hold of physical.

Ultimately, when you deal with the Perth Mint, you are taking an exposure to the Government of Western Australia. One may then ask can the Government handle a large gold loss. Again, consider the $13b worth of metal refined each year. All the Government has to do it apply a special "Perth Mint stuff up royalty" on gold production.

Consider also that it is near impossible for there to be a loss of the entire $2b, either as theft or fraud. With theft they would have to clean out the entire operation at both city and airport sites, including semi-finished product and dissolved gold in chemical solution mid-refining, for example. I can't see how even Hollywood could come up with a plausible plot for that gold heist. Plus we have to have the insurers renege as well, remember.

In the case of fraud the management simply cannot not have bought no metal with client funds, as that would mean there was not one ounce of physical gold in the mint or refinery. Just a little suspicious wouldn't you think and not what you want if you are trying to pull off a fraud.

So lets assume half of it is lost, $1b. Government could fund that with a five year 1.5% "Perth Mint stuff up royalty" on annual gold production. That isn't unrealistic considering that the current royalty is 2.5%.

I think the question is not what would happen if there was insolvency, but whether insolvency is even realistic, considering a) the likely probability of loss, b) the realistic maximum loss, and c) the capability of the Government to fund a loss.

New Perth Mint LBMA Bar Mark

The new Perth Mint bar mark as registered with the LBMA. Smaller bars will have the same swan mark but words around it in a circle. The bar pictured is a 400oz bar, 9960 being the purity (99.6%) and the year and bar number (see Good Delivery rules). Weight is specified on a bar listing as per LBMA rules page 9:

"It is strongly recommended that weights should not be stamped on Good Delivery bars. The reason for this is that when bars are weighed in London by an LBMA approved weigher their weights, which may be different, will prevail, and also any adjustment to the weight of a bar caused by future handling or sampling would necessitate alteration to the mark. If bars are so stamped, the unit of weight must be shown."



Below is picture of a bar stack for you to drool over.

King World News & Scotia Certificates

*Updated table on 14 Feb 2012 with 2011 figures*

In this interview, Lenny Organ (son of Harvey Organ who was at CFTC hearing) recounts how at a recent visit to the vaults of ScotiaBank they saw little physical precious metals and had to go to some trouble to get physical.

I analysed Scotia's annual report back in September 2009 after seeing a blog by ispeakofpeak on the issue. At that time the annual report revealed that Scotia only had 43% of its gold and silver certificate liabilities backed by physical metal. The table below updates that post with the most recent report (note: Scotia's financial year end is 31 Oct, figures in millions of dollars).

Year
Ending Liabilities Assets Physical cover
Oct 11 3,931 9,249 100%
Oct 10 5,153 6,497 100%
Oct 09 3,856 5,580 100%
Oct 08 5,619 2,426 43%
Oct 07 5,986 4,046 68%
Oct 06 3,434 3,362 98%
Oct 05 2,711 2,822 100%
Oct 04 2,018 2,302 100%

It appears that the physical backing was running down from 2006 but is now back to 100%+, with $5.58 billion of physical. This contrasts with Lenny Organ statement. Either Scotia have run down a lot of physical in 6 months or it is stored elsewhere.

I do find it interesting that the gold and silver certificate liability has declined from $5.619b to $3.856b in the past year, a year when most ETFs, GoldMoney and BullionVault and Perth Mint have shown increasing amounts of metal held.

I agree with Adrian Douglas' statement in the interview that many storage providers "are very vague about what is backing their paper certificates and if they are vague I think you should not give them the benefit of the doubt". Contrast this statement from Scotia about their unallocated:

"Scotiabank gold certificates are backed by the assets of The Bank of Nova Scotia. Unallocated gold is a claim on The Bank of Nova Scotia for the ounces entitlement to a specific quantity of gold bullion."

with the Perth Mint's:

"With unallocated storage, also known as a metal account, clients purchase an interest in a pool of precious metal held by The Perth Mint. The Mint purchases an ounce of precious metal from the spot market for every unallocated ounce it sells to clients. Accordingly every unallocated ounce is 100% backed. ... The Perth Mint is not a bullion bank and does not provide project financing or bullion lending/derivative services to mining companies or other entities. It does not lend client's unallocated metal to support short selling transactions or other derivative activities. The unallocated metal is utilised solely to fund the Mint's operations."

You should always read the fine print.

Perth Mint to acquire full ownership of AGR Matthey

Last week the three partners in AGR Matthey decided to dissolve their partnership. The Perth Mint will acquire full ownership of the gold and silver refining business in Perth and Johnson Matthey will acquire full ownership of the platinum and silver brazing alloys business in Melbourne. Newmont will exit from these businesses entirely but will continue to have its Australian-mined gold refined at the Perth refinery. There are still some conditions precedent that need to be met before the deal is concluded, but the partners see no reason why these will not occur.

It is a move I am very excited about as it gives the Mint direct control over the refinery’s output, which is typically between 300 to 400 tonnes of gold a year. I’m reminded of the old adage, "He who owns the gold, makes the rules", but of course the Mint doesn’t own the gold, its clients do.

The substantial physical inventories needed to support this throughput, and the Mint’s own stock, have been backing Depository client metal for many years. All this acquisition will do is change the refinery’s inventory from being listed as a metal receivable in the Mint’s financials to being a directly owned asset. This should increase the comfort factor for many Depository clients even though it doesn’t really change the fact that their holdings have been, and always will be, backed by physical.

I will be interested to see how the Mint’s critics and competitors try to spin this news against us. It does make it hard to argue that a business that refines 300 tonnes of gold a year “doesn’t have any gold”.

Maybe they’ll argue that we had to get the refinery to plug the imagined short position that they think we have. Apart from exposing their woeful ignorance of how our operations and a refinery’s work, the logical conclusion of such a position would be that the supposed short position is now plugged, making the Depository a totally safe facility!

For those not aware, the AGR refinery operations were originally established by the Perth Mint in 1899 when it was founded as the Perth branch of the British Royal Mint. In 1998 the refinery was combined with the refinery operations of Golden West to form the AGR Joint Venture and then subsequently merged with Johnson Matthey’s Melbourne refinery in 2002. So in a way the refinery business is just coming back to its home.

Fat Prophets

Fat Prophets have been gold bulls for a long time and I give them kudos for that. However, in a recent article The Silent Gold Rush Is On they make the following faulty analysis:

The Australian newspaper reported over the weekend that the Perth Mint is not taking any more orders for gold until January. Our guess is that the Mint does not want to expose itself to higher future prices given that it does not have the inventory to meet the demand for bullion.

I sent the response below to them a couple of weeks ago, no response as yet:

Your guess that we do not want to be exposed to higher future prices is incorrect and is based on a misunderstanding of how the gold markets work. If we take an order and fix a metal price (it is also possible to take an order and agree to fix a price at the time the bullion is ready for delivery) then we immediately buy the raw gold that will be used to make the bars/coins for the client. There is therefore never any exposure the future prices. I discuss this is more detail in my blog on the value chain.

I really wish commentators would just call us up and ask us questions, rather than just guessing or making stuff up.

AWOL

Yes I am still alive. My break from blogging started with a trip to Canberra for the http://www.goldstandardinstitute.com/ conference. It was great to catch up with the attendees from last year and meet some new gold investors. The weekend after it was a short drive up to the Southern Highlands of New South Wales for the Highland Fling - a 100km mountain bike race. Six plus hours is physically tough, but it was harder mentally.

The plan was to get back to blogging on my return but the new Treasury system project I've been working on (in addition to the revamp of the Perth Mint's retail shop) kicked in with at lot of work required to meet deadlines. The new system will give us some efficiencies and thus help with customer service but we have decided to NOT go online for trading.

It is a bit old school, but the Treasury system will be standalone from our other computer systems and with no online ability means your account is just not hackable. I'm interested in any feedback on that decision - we feel if you want the ease of online then you can trade our ASX product (code ZAUWBA) or GoldMoney or BullionVault.

This Treasury system is going to take up some time so my blogging will be less frequent over the next few months but I'll keep any eye on any big issues that come up.

AUSTRAC Identification Rules

Further to my post on AUSTRAC rules on identification for bullion transactions, I can report that the Perth Mint has just received an approval to set the limit above which some form of identification for a bullion transaction is required from $2,000 to $5,000. This now gives some more room for people to privately acquire gold and silver.

Looking at page 11 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2009 (No. 2), it appears this approval is for every bullion dealer, not just the Perth Mint. If you are having problems with bullion dealers wanting to ID you for deals under $5,000, maybe handy to show them this Amendment Instrument.