23 October 2008

Unallocated vs Allocated

On this Kitco forum thread, a question was asked about whether one should be converting from unallocated to allocated. Many years ago I wrote up the following text on this page of the Perth Mint website:

The Perth Mint maintains finished goods inventory of its coins and bars at all times to meet normal demand from its distributors and Depository clients. Accordingly, unallocated clients will usually be able to convert their metal within a few days of giving notice.

However, 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:

1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges.
2. When the environment becomes uncertain and risky, they convert to allocated.
3. When the world is at a crisis point, they take delivery of their physical metal.

This approach can save clients significant amounts of money as it may be some time between stage 1 and 2. Clients who do not feel they can judge the shift from stage 1 to 2, or feel it may be sudden and unpredictable, opt for allocated as they are using precious metals as "insurance" and see the storage fees as the cost of that insurance.

Each person will have a different assessment of what stage we are at. One thing to note is that the Perth Mint has a legal obligation to do conversions/collections, so those orders will always take priority over any other orders in the system, which gives some people comfort.

There were a few other questions raised that may be of interest.

"If the demand continues to be high then production capacity will rise and premiums will fall in the end. But will this coin/bar demand ever be big enough to influence the spot more than marginally?"

I have speculated in this blog that the industry will eventually respond, but it won't be quick as two things need to happen: 1 bosses in refineries and mints "get it" that the demand is staying high; 2 takes months to buy and commission equipment. High premiums are here to stay for at least 6 months if demand continues.

I think if the current demand was able to be filled then it would have an impact on the spot price because it would take physical off the market. Coin and bar demand is somewhat sticky. The fact that demand has not be able to be met has resulted in buying power being "wasted" on high premiums instead of on buying more ounces.

There is also no doubt in my mind that the US ETF has also impacted on the price by providing an easy way for the average person to buy gold. That was the whole reason the World Gold Council (run by miners) paid to get it set up - they wanted a easy way for physical to get taken off the market. Problem is that it is also easy to sell, and i think that is what is causing the volatility in the gold price. Compared to coin and bar buyers, ETF investors are more fickle in my opinion. The World Gold Council would have been better off ensuring the industry was ready to meet retail demand for coins and bars, because that also takes physical off the market, but for a much longer time.

"when do you think the paper spot price may be reconciled with the physical spot price + premium? Do you think there is an intentional cornering of retail market by big players, or is it just a priority of serving wholesale customers first. If there is a real shortage, why not charge wholesale customers more?"

In my experience, and this may just reflect the type of clients I've dealt with, but new highs in the gold price drive new account openings so the price drop will cool things a bit, but just a bit as the key driver now is still uncertainty about the financial markets and banks.

There isn't any cornering of the retail market by big players - all "wholesale" deals for coins and bars are to dealer who resell to the public. If a mint is at capacity selling product to a wholesaler or retail customer doesn't actually change anything really, because it all ends up with retail customers in the end. The big private clients I know who go allocated may well buy some smaller coins and bars, but the bulk of their metal is in 400oz and 1000oz bars as they are the cheapest.


  1. Simple for me this. If there was a dash for gold in an extreme situation the Perth Mint could not cope. ETFs like GOLD on the ASX are better as you always know they are 100% backed by allocated metal.

  2. Hi again Anonymous,

    If there was a dash for gold, GOLD is of no use because you can't take delivery in Australia.

    The Perth Mint can easily cope if there are a lot of requests for unallocated conversions to physical, it will just divert all production capacity from supply export markets (80% of their production is exported) to meet the requests for physical.

    Considering Australia produces 250t per year it is a bit rich to imply that getting physical in Australia would be a problem.