31 March 2011

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.

16 comments:

moneyrain said...

Hi Bron,
Firstly, thank you for your efforts around cyberspace, to inform those seeking straightforward information on precious metals without the incessant emotion and hype the great unwashed tend to produce online. However I have to admit their rantings and misunderstandings do have a certain entertainment value.

Simple question, you wrote “at some point Depository will also close Pool Allocated and Allocated”. Does this mean the ASX listed PMGOLD will also be closed around the time Pool Allocated and Allocated close?

Regards
moneyrain

Bron said...

Yes, we would also have to close PMGOLD to new inflows as well at that time.

intuitivereason said...

The thought had occurred to me and the sense that I had was that volumes in stock were still relatively small compared to that which was being leased. Then again, I'd only enquired about the gold side of things.

Good luck keeping on top of the disinformation.

Anonymous said...

what are the implications of the change to pool allocated to the potential for future confiscation by the Australian government? You had indicated that unallocated may potentially be less at risk of confiscation, at least at first, due to its nature as inventory and not as identifiable bars. Now that bars are held in the safe, wouldn't it place this product at higher risk of confiscation?

In any case I am going for silver over gold as it requires an act of parliament to confiscate whereas gold confiscation simply requires the government to reverse the current suspension of the existing gold confiscation laws.

Bron said...

The pool allocated is a new product so will not affect unallocated which will remain backed by operational metal.

Pool allocated is much more like allocated in that there is specifically identifiable metal backing it so would be physically confiscatable unlike unallocated (unless the Federal Government was willing to shut down the Mint, which is doubtful as who would refine?).

Anonymous said...

Bron,
Thank you for your straightforward and accurate explanations. Those are remarkably hard to find in the gold/silver world.

A question about unallocated: is any/all of the metal in the Perth Mint pipeline already sold, in the form of pre-ordered goods? If so, does this mean that unallocated holdings are backed by pipeline metal that's also committed elsewhere, which would seem like a form of double-counting?

If the answer is no, the Perth Mint only sells finished product, so it controls/owns all metal in the pipeline, what would happen in the following scenario? Let's say there are (for illustrative purposes) 1M ounces of gold in the pipeline, and 500K ounces of unallocated sold. Now let's say that there is a huge physical squeeze, and the price of gold goes up 10X. At that point, all 500K ounces of unallocated are redeemed as physical. Would the Mint really hand over half the contents of its pipeline, badly damaging its business for some period of time because it wouldn't have enough metal on hand to produce at the normal rate? Basically, if a lot of unallocated is redeemed as physical, the Mint is suddenly in the position of having to repurchase its inventory and refill the pipeline, possibly taking a substantial profit hit in the process, since in the above case the replacement inventory would cost a lot more.

I'm just wondering whether the Mint is taking a business risk by letting investors provide its inventory float, and whether it might wind up delaying redemptions as a consequence if there are too many in a short period.

Thanks again for an excellent blog.

Anonymous said...

Bron,

I posted the text below as Anonymous on April 17, and it showed up immediately (I cut and pasted the text below from that posting), but then vanished a few minutes later. I have no idea what happened, but I'm posting it again.

---------------------
Bron,
Thank you for your straightforward and accurate explanations. Those are remarkably hard to find in the gold/silver world.

A question about unallocated: is any/all of the metal in the Perth Mint pipeline already sold, in the form of pre-ordered goods? If so, does this mean that unallocated holdings are backed by pipeline metal that's also committed elsewhere, which would seem like a form of double-counting?

If the answer is no, the Perth Mint only sells finished product, so it controls/owns all metal in the pipeline, what would happen in the following scenario? Let's say there are (for illustrative purposes) 1M ounces of gold in the pipeline, and 500K ounces of unallocated sold. Now let's say that there is a huge physical squeeze, and the price of gold goes up 10X. At that point, all 500K ounces of unallocated are redeemed as physical. Would the Mint really hand over half the contents of its pipeline, badly damaging its business for some period of time because it wouldn't have enough metal on hand to produce at the normal rate? Basically, if a lot of unallocated is redeemed as physical, the Mint is suddenly in the position of having to repurchase its inventory and refill the pipeline, possibly taking a substantial profit hit in the process, since in the above case the replacement inventory would cost a lot more.

I'm just wondering whether the Mint is taking a business risk by letting investors provide its inventory float, and whether it might wind up delaying redemptions as a consequence if there are too many in a short period.

Thanks again for an excellent blog.

Bron said...

I never saw your comment in my RSS feed, Google must have gobbled it up.

"is any/all of the metal in the Perth Mint pipeline already sold, in the form of pre-ordered goods?"

If we have sold it (as in fixed the metal price) then we immediately buy replacement metal. Eg we have 10oz physical and owe depository clients 10oz. We pre-sell 2oz, so we then buy 2oz. So we now have 12oz but owe 10oz to depository clients and 2oz yet to be delivered to a client.

"Would the Mint really hand over half the contents of its pipeline, badly damaging its business for some period of time because it wouldn't have enough metal on hand to produce at the normal rate?"

Yes, but we would attempt to source replacement metal. If we couldn't source replacement metal then we would hand over half our working inventory and just have to deal with running our business on what is left.

"the Mint is suddenly in the position of having to repurchase its inventory and refill the pipeline, possibly taking a substantial profit hit in the process, since in the above case the replacement inventory would cost a lot more"

No, we would not, nor have ever, "purchased" metal for our inventory - that is, paid cash. We would attempt to source replacement metal, but that would be by borrowing it, not buying it.

"whether it might wind up delaying redemptions as a consequence if there are too many in a short period"

Yes there could be delays, that is one risk you take with our unallocated. We are upfront about that on our website http://www.perthmint.com.au/investment_invest_in_gold_storage_options.aspx:

"it is important to note that if you request a physical product that is not in stock, or a very large quantity, the Mint may need to manufacture it. The lead times for manufacture will depend upon the size of the order, current demand and production capacity. It is because of this uncertainty that some clients choose allocated storage - as their metal has already been fabricated it is ready for collection at short notice.

Clients worried about potential delays in collecting metal in extreme circumstances, but with concerns about the cost of allocated storage, usually take a staged approach"

Elly said...

Bron, I HAVE asked the question about closing unallocated in the past - I even threatened to file an FOI request to find out your plans in this regard.

Bron said...

I don't think you can put in an FOI about potential business plans.

Note exemptions under Freedom of Information Act 1992

10. The State’s financial or property affairs
(1) Matter is exempt matter if its disclosure could reasonably be expected to have a substantial adverse effect on the financial or property affairs of the State or an agency.
(2) Matter is exempt matter if its disclosure would reveal trade secrets of an agency.
(3) Matter is exempt matter if its disclosure —
(a) would reveal information (other than trade secrets) that has a commercial value to an agency; and
(b) could reasonably be expected to destroy or diminish that commercial value.
(4) Matter is exempt matter if its disclosure —
(a) would reveal information (other than trade secrets or information referred to in subclause (3)) concerning the commercial affairs of an agency; and
(b) could reasonably be expected to have an adverse effect on those affairs.
(5) Matter is exempt matter if its disclosure —
(a) would reveal information relating to research that is being, or is to be, undertaken by an officer of an agency or by a person on behalf of an agency; and
(b) would be likely, because of the premature release of the information, to expose the officer or person or the agency to disadvantage.

And we get our own special exemption

15. Information as to precious metal transactions
(1) Matter is exempt matter if its disclosure would reveal information about —
(a) gold or other precious metal received by Gold Corporation from a person, or held by Gold Corporation on behalf of a person, on current account, certificate of deposit or fixed deposit; or
(b) a transaction relating to gold or other precious metal received or held by Gold Corporation.

Anonymous said...

Bron,

Thank you for a typically clear answer to my question about how unallocated in the pipeline is handled.

Anonymous said...

Bron,

Thank you for your typically clear answer to my question about unallocated holdings and the Mint pipeline. I now think I understand this completely, but I will point out that one reason for my prior confusion is this:

Even if the Government's finances are strong, isn't the Guarantee worthless if the Mint cannot obtain the gold?

The Perth Mint does not have any problems obtaining physical gold, or other precious metals. Australia has been one of the world's top three gold producing countries for some time. The Perth Mint Refinery processes over 400 tonnes of gold a year.

[http://www.perthmint.com.au/investment_invest_in_gold_government_guarantee.aspx]

That quote makes no sense if the Mint actually owns as many ounces as are in the unallocated program; the Mint, as you say, would then not need to acquire any new gold in order to honor the Guarantee.

Correct?

Anonymous said...

Bron,

The comment system swallowed this comment too, so I'm trying again...
----------------------

Bron,

Thank you for your typically clear answer to my question about unallocated holdings and the Mint pipeline. I now think I understand this completely, but I will point out that one reason for my prior confusion is this:

Even if the Government's finances are strong, isn't the Guarantee worthless if the Mint cannot obtain the gold?

The Perth Mint does not have any problems obtaining physical gold, or other precious metals. Australia has been one of the world's top three gold producing countries for some time. The Perth Mint Refinery processes over 400 tonnes of gold a year.

[http://www.perthmint.com.au/investment_invest_in_gold_government_guarantee.aspx]

That quote makes no sense if the Mint actually owns as many ounces as are in the unallocated program; the Mint, as you say, would then not need to acquire any new gold in order to honor the Guarantee.

Correct?
Bron,

The comment system swallowed this comment too, so I'm trying a different browser...


Bron,

Thank you for your typically clear answer to my question about unallocated holdings and the Mint pipeline. I now think I understand this completely, but I will point out that one reason for my prior confusion is this:

Even if the Government's finances are strong, isn't the Guarantee worthless if the Mint cannot obtain the gold?

The Perth Mint does not have any problems obtaining physical gold, or other precious metals. Australia has been one of the world's top three gold producing countries for some time. The Perth Mint Refinery processes over 400 tonnes of gold a year.

[http://www.perthmint.com.au/investment_invest_in_gold_government_guarantee.aspx]

That quote makes no sense if the Mint actually owns as many ounces as are in the unallocated program; the Mint, as you say, would then not need to acquire any new gold in order to honor the Guarantee.

Correct?

Anonymous said...

Giday Bron,
when changing from unallocated gold to allocated the Perth Mint buys the unallocated, sells allocated and bills the client the difference.

Has the Perth mint a ruling from the ATO on whether this is a tax event? Surely it must be a fairly common ocurrence.

It could be argued that the client is merely changing the form of metal held and paying for the privilege. Tax is still exacted when the metal is eventually sold.

On the other hand it could be argued that an upward trend in the metal so far should be counted as a profit and subject to tax... with the second half of the transaction just a purchase for later taxation.

The same goes for changing bars to coins?

Thanks for your honesty, helpful information and clarity of answers.

Bron said...

I don't have any info on the Australian tax situation similar to this for the US http://solari.com/articles/Tax_Issues_re_Precious_Metals_Holdings

I don't know if the same like-for-like rules apply. My guess is probably not, knowing the ATO.

However, the buy unallocated, sell allocated is just the way we have to put it through in our current system due to system limitations, so I would not consider that a tax event as "allocation/deliver" is not a tax event for PMGOLD.

See http://goldchat.blogspot.com/2009/09/capital-gains-tax-and-gold.html for further info

Anonymous said...

Thank You