07 December 2008

The Mint has no gold, again.

Another addition to the ultracrepidarian files. See this Kitco forum topic about the Mint raising yet again that you can't trust the Mint's unallocated. My reply below:

In the latest annual report on their website it states a figure of AUD 1.387 billion worth of metal in its Depository/Certificate programs (note 26b on page 38). There is no split between gold and silver.

Silverthorn is correct about not going broke, minting has to be one of the few counter-cyclical industries (which is why I am happy working there), although to be correct it is not the Mint you have to worry about going broke but the West Australian government, as the Mint is owned and guaranteed by the government.

As for the naysayers, the issue is not the profitability of the Mint or solvency of the government but the belief that the Mint does not have the metal to back its liabilities. What they say is that the Mint takes your money and doesn't buy the metal. It then has ounce denominated liabilities that in dollar terms could increase dramatically if metal price went up but only have a fixed dollar amount in cash against that increasing liability. Then when clients come to sell or collect metal, the Mint will not have enough cash to pay out at the then higher market prices or have the metal for collection.

Now even the Mint's biggest critics would admit that it and AGR Matthey (where a fair amount of the metal is held) must have some physical metal lying around. Considering that Australia produces 250 tonnes a year and all of that goes through AGR Matthey and the Mint made 8.1 million blanks (page 14 of annual report, this number includes blanks used by the Mint for its own coins), I think a conservative case can be made that there must be $387 million worth of metal at least. So according to the naysayers there would be $1b exposure. But the accusation is that the Mint got money for this but did not buy the metal, so how much cash would it have?

If you look at past annual reports you'll see that most of the Depository's growth occurred in the past few years. So lets assume that the average buy in price has been AUD 500 per ounce, or half of the current price. This would mean that the Mint would have half of the $1b exposure in cash, or $500m.

So if the gold price doubles (which I think most would be happy with), then the $1b turns into $2b exposure with only $500m in cash so the Mint will out of the money by AUD 1.5b. This is a big number but in my opinion not enough to break the West Australian government considering it has the power to tax. For example, if it decided to levy a 0.5% royalty on gold for 5 years that would give 250t x 32015oz/t x $2000/oz x 0.5% x 5 = $400 million.

Anyway, the question is why would the government do it? The only benefit they would get is not having to borrow $500m, because they use the $500m that Depository investors gave the Mint instead of buying gold. At an interest rate of 6% that means that the government saved a huge $30m. Compare that to the government's budgeted expenses of approx $18b.

So the naysayers think that it is reasonable that the government would think it is a good idea to risk $1.5b to save $30m a year, so their expenses can be reduced from $1800m to $1770m? Oh, yes and since we have just had a change of government, the new premier and cabinet would also agree that it is smart to continue to carry a $500m shortfall (which could become a $1.5b shortfall) to save $30m a year instead of taking the hit and revealing it, which would do so much damage their political opponents that they would be guaranteed the next couple of election wins?

OK, so I think most people would agree that you would have to be taking drugs to think that the above is a likely scenario. So that then leaves the explanation that the Mint’s management is hiding this from government. Why would they do this? Well the only plausible motivation is money, or in other words boost profits so you get paid a big bonus. But then if you look at the past annual reports you don’t see any huge $30m profits and if you look at page 39 (the page all the staff check out each year) you’ll see that one director earns between $390-400k, which is the CEO (as he is also a director). Last year it was $370-380k, so no massive bonus. So do you think it is reasonable that the CEO would allow a $500m exposure for no personal benefit?

So then the last explanation must be that the CEO and a few others have fraudulently siphoned off the $30m a year. But for this to be true you then have to believe that 4 different auditing teams (the internal and external auditors of both the Mint and AGR Matthey) are either 1) so incompetent that they could not find a $500m hole in the accounts or 2) that they are all part of the fraud and have been paid off. Oh, yes and this would include the Auditor General of the government and that this has been going on for a number of years and continued through the rotation of those 4 auditing teams during that time and of course the cooperation of the accounting staff and CFOs of both organisations and that not one of any of those persons involved would whistleblow any of it.

Does any of that sound reasonable or likely to you?

In response to that, vespuce asked:

On your post I would counter the following:

1) Assume liability of $1bn, fine, but we don't know how much of that is silver, or how high the price could spike. You suggest a doubling of price, wheres the risk is far greater. Let's say 80% silver, 20% gold, and the dollar collapses - silver could quickly move to over $100/oz. PM would be underwater by $7.6bn on just the silver. The point is, perths (or anyone elses) unhedged exposure is infinite in fiat terms.

The rest of the points may be not be relevant, because I think you started with a false premise (ie the potential exposure).

2) Why would government try to save just 6% on $500m (with unlimited exposure) when they have $18bn budget? I say why wouldn't they. First we know they are not rational and efficient institutions. And more importantly it would be another $500m channelled away from the physical gold and silver markets.

3) You say the incumbent governemnt would spill the beans on any discovery of the unhedged exposure? I dont accept this for one second. Most would be oblivious. There are much bigger dirty secrets going on. I really wouldn't underestimate governments ignorance, stupidity or ability to deceive.

4) Reliance on auditors? Two words, Aurther Anderson.

My reply to that was:

vespuce, thanks for the counter arguments, best way to work out all the angles and test one's case.

I only assumed a doubling to be conservative. You are correct, the exposure in infinite, but would this not make it only more ludicrous that anyone would take on such an exposure to only save $30m in interest? The bigger you assume the exposure, the more unrealistic that anyone would do it.

As inefficient and incompetent governments can be, I still don't think they would take on such a risk for such a small return. You sort of implicitly acknowledge this by raising the "more important" reason of suppressing the price.

Firstly, lets assume that all of the $500m is gold. At $500/oz (ie average price clients "think" the Mint bought metal for them), that is only 31t over say 3 years or 10t a year that has been "channelled away" from a market where total world production is 2500t. If you compare that to trading volumes it is even more pathetic. 10t a year is not going to move the price, so why do it?

Secondly, the Mint is not the Reserve Bank of Australia or controlled by the Federal Government, who are the ones in charge of fiat currencies and therefore interested in managing currencies (one of which IMO is gold and silver). The Mint is owned by the West Australian government, and West Australia has a big gold mining industry and these people vote, so why try to depress the price which will only make people unemployed and hurt royalty revenues as well

As to your third point, I can't really say much except that they aren't as ignorant or stupid as you believe. It is somewhat of a trite statement. I have met the officials from the Auditor General and also the three Government representatives we have had on the Board (they are appointed by the Government to keep and eye on us) and they are intelligent and honest people. For example, John Langoulant, who was on the Mint's Board for many years while he was WA's Under Treasurer, recently resigned as CEO of the WA Chamber of Commerce and Industry to become CEO of media mogul Kerry Stokes' Australian Capital Equity. Kerry Stokes is one of Australia's top 10 richest persons and circa #700 in the world. You think Kerry is going to employ someone "ignorant and stupid"?

Auditors - again I would assert that this is a trite statement. Usually auditor scandals relate to suspect interpretations or valuations of unclear financial instruments or other activities. What we are talking about here is a very simple fraud. If you look at page 21 of the Mint's annual report you will see that it says there is $751m of precious metal INVENTORY and $1,080m of leases to AGR held as INVENTORY. I would put to you that the word "inventory" is not subject to much interpretation for an auditor. If the Mint kept $500m in cash and didn't buy the metal then I would argue that it is highly unlikely that an auditor would be that incompetent that they could be deceived that there was $1831m of inventory instead of only $387m and not find traces of the $500m in cash we received instead of only the $23m in cash reported in the annual report. I suppose then that our bankers Westpac and JP Morgan (OK I suppose they would be in on any scam as no goldbug trusts them ) were in cahoots to divert the cash from the auditors.

Furthermore, the auditing teams have at least rotated once, so I think that would cover most of the top tier firms. One or two stupid or corrupt auditors, I suppose, but all of them, over many years?

This really then leaves incompetence or conspiracy by all these people:

1. Two internal auditing teams of say 4 people each rotated once - 16 people
2. Two external auditing teams of say 5 people each rotated once - 20 people
3. CEO, CFO, group accountant, finance manager, accountant and settlements person in each organisation to dodge the books - 12 people
4. Me and Treasurer and similar executives at AGR - 4 people
5. You would need at least three people at the two banks to pull off the misdirection of $500m and probably more, but lets say 6 people
6. Board Directors of both organisations, with changes over 3 years, say 20 people
7. Auditor General and one other official - 2 people
8. Minister and Premier - 2 people

Now I'll be generous and say that you don't need all of these to be involved in the conspiracy, but then you need those that aren't to be incompetent. So 82 people all up and for what? To save $30m in interest and take 10t of demand off the market per year.

I just don't consider any of that realistic. It can only make sense if there is something to be gained and that gain is worth the risk. Do you think a criminal will steal a 30 year of car in front of a police station or a new car in a back alley? $30m and 10t a year is like a 30 year old car in terms of the (non) impact it would have, so why do it?

The focus of the above comments are on the idea that the Mint's unallocated is a scam. I should point out that by doing so I'm not trying to convince anyone that storing with someone else is the only way to go. I understand all the reasons for self storage and if that is what you feel safer with, then great. But there are other people to whom the risks of self storage are perceived as higher than trusting someone else with it. The Mint doesn't really care one way or another whether you like the storage or not because we sell both storage and physical bullion (and are flat out doing so right now), we can make money no matter what view you hold.

When people attack the Mint, it is worth asking if they are a competitor of the Mint. I have found that usually they are either those selling storage services themselves or selling only physical bullion. My view is that the Mint's free unallocated storage/physical metal in operations business model is far too competitive against these, I mean how can you compete against free storage? Therefore they only way they can compete is to sow doubts about unallocated and the Mint.


  1. Dingbats will never be satisfied. I recall one of them calling for someone to be allowed into Perth Mint with a video camera, to record whether the metal present. This would of course have proved nothing. Clowns. Helps their own businesses though by casting doubt on a competitor.

  2. One must be generous with the dingbats, they tend to be from places less sucessfull with institution building.

  3. The discussion continues on Kitco but no one seems to have a counter argument to the reasonableness of the scam and have just reverted to “storing with someone else is bad”, which is an OK view but misses the point.

    Anyway it has been fun to put myself in the shoes of the conspriacy theorists and try and work out exactly how much of a scam it would be (not much when you think about it).

  4. One of those dingbats just met with people from the Perth Mint in the US and brought his "Mom" with him just in case they were going to beat him up. Funnily enough he suggested that the mint video its metal..... Amazing....


  5. Bron, I have two unallocated gold certificates, which I bought on the understanding that Perth Mint backed it 1-for-1, as advertised on the Mint website:

    So, is my unallocated backed 1-for-1 in gold inventory or not?

  6. I just listened to that interview with Hommel, with the dense Korelin trying to feed him lines. Pathetic. Just exactly why would Perth Mint reveal its operations to the likes of Hommel ? They have nothing to gain from it, and would compromise themselves in a mighty big way. He has a nerve to complain about jurisdictional problems. If he had been making his allegations in Australia, he would have had a massive libel action to contend with. Its funny how this guy lives in California, yet publishes his 'newsletter' in Florida. Would it be to protect himself from libel ?
    Are there no bounds to this guys lack of integrity ? He has accused the Perth Mint of malfeasance for over a year at least, then according to the interview, he suggests a business arrangement with them. If I'm suspicious of someone, I certainly don't transact with them. Reasoned thought is obviously a foreign concept to this man. Perhaps his mummy could teach him some, but probably not.

  7. a said, it is backed 1:1, but by "in operations", which intially may not sound much different from "inventory". "Inventory" implies nice pre-made coins and bars. Unallocated is not 100% backed by coins and bars, a fair bit is, but a lot of the gold and silver is in other forms, eg extruded strips, sitting in chemical solutions etc.

    This is an important distinction because it does mean that if everyone turned up at the same time, not everyone is going to get coins and bars straight away as the metal in other forms will have to be made up, so some will have to wait. This is one of the trade-offs for getting storage for free.

    As for Hommel, well he says he is going to think a bit more about the discussion and clarify things with the Mint, so lets wait and see how it pans out.

  8. wheres does the zauwba etf fall under, allocated or unallocated? Is it also 1:1 backing?

  9. ZAUWBA is basically the unallocated storage option in the Depository business but listed on the ASX, so it is 1:1 backed as well.