25 July 2012

Expect Precious Metals Shortages During The Next Crisis

Fear mongering is the stock in trade of most gold commentators/spin merchants it seems, so here is my modest contribution in this interview with Kerry Lutz :)

Seriously, the industry's limited (in the face of mass market demand) production capacity is just a fact, and one I've covered many times before on this blog (see the Shortage label).

I got a lot of grief in this forum discussion about why the Perth Mint wasn't massively expanding capacity for the obvious demand surge that would happen in the future. I covered that briefly in the interview - shock - minting is not that profitable compared to other investment opportunities. The result is no entrepreneurial money goes into building mints.

As an example, look at where the entrepreneurial effort has gone in precious metals - distribution, eg GoldMoney & BullionVault. These are low cost software based businesses which haven't even bothered to build and run their own vaults. That's not a criticism, it is smart business. Who wants to spend $100m+ builidng a start of the art high volume precious metal mint to earn revenue of 4.5% on a 1oz coin? Note, 4.5% is gross revenue, not profit. There ain't much left after operational costs, depreciation, tax etc.

As I say in the interview, it may only be increasing premiums which will draw investment into the industry. However, that will take time to translate into extra capacity. The end result I see is sustained high premiums, which will make pooled metal "products" like Perth Mint Depository, GoldMoney, & BullionVault and, unfortunately, ETFs, a lot more attractive to the mass market coming into precious metals for the first time.


  1. Would you be able to cope if all of the sudden everybody wants gold and the majority of society as a whole would spend a trillion dollars in gold bullion. Thats about 700 million ounces of gold on todays market. I am sure it must be easy to process gold as printing paper money.

    Paper money is equivalent to rocks and painting them gold.

  2. Why "unfortunately" ETFs? Is this a FOFOA-type comment? It must totally disregard the benefits of ETFs in consistently improving the (paper) gold price which, after all, is all that matters to most investors not waiting on the hallelujah moment when free gold finally arrives after 30+ years.

  3. Good post Bron.

    I must admit that it didn't really occur to me that the profit was so low, but it makes a lot of sense.

    The numismatic side would do okay, but bullion isn't even really creating a product so much as packaging it (in different sized amounts perhaps). So obviously then the buy/sell prices are fairly close.

    Also, as the Perth Mint is owned by the state of WA, I suspect it has a little less licence to speculate on future price trends. State/govt strategies in that respect tend to be very reactive, rather than forward looking. Not sure if the Perth Mint falls into that or not. I'm fairly sure no public servant CEO would put their neck on the line speculating on future profits that won't directly benefit them. That's the system.

    When it comes to products and marketing though, I'd say the Perth Mint does okay. You've obviously ramped up marketing a lot in the last few years. Marketing is one area where creative licence is given though, so I can understand the push.

    It's hard isn't it - the Perth Mint just can't seem to cut a break from people. When demand is high, people can't get their products fast enough, and yet they go and praise the ease of using ETFs which are essentially just a book-keeping business that ultimately offers less security.


  4. Gordon, the "unfortunately" comment is not Fofoarish, it is about the fact that many ETFs have a lot of cop out clauses around insurance and liability for losses if metal is not kept safe.

    Pete, my "speculate" I assume you don't mean price speculation but spending capital equipment on the hope the demand for our product materialises?

    Note that the Government only gives us two restrictions: such as “don’t increase our net debt” and “your dividend payout ratio is 75%”. This means we have to pay for capital expenditures out of a fairly limited cash flow stream. We would like to spend more.

  5. Hi Bron, yes I mean speculative investment based on demand - eg, buying two more minting presses.

    Unless you have loads of spare capital (not sure when that would ever happen...it'd get spent by someone) then you'd definitely have to increase debt to make such risky investments.

    Interesting to know those restrictions though. Do you think restrictions are similar around the globe? I wonder if a global surge in demand would mean shortages all-round, or if some mints would cope significantly better than others.

  6. The two restrictions I mentioned are probably unique to us as we are an explicitly commercial operation within the WA Government.

    Other government mints probably run with different restrictions around overall government expenditure. I think where politicians have to decide between spending $50m upgrading a mint to make more coins versus $50m on a new hospital or just on something which is more directly beneficial to voters, they will go with the latter.

    Hence it is really up to private investors to build new mints.

  7. It would be impossible for private investors to build new mints, didn't NORFED get cracked down on by the government?

  8. No, there is Sunshine Mint, Northwest Territorial Mint. Minting your own coins isn't a problem as long as you don't try and pass them off as official coinage.

  9. A question for your informed opinion on Silver Eagle supply during next "crisis". From what I had read last year, the US mint had been able to increase their monthly supply of silver blanks to around 4 million units. With the slow down in sales so far this year (19,160,000 ASE's, plus approx 500,000 proof ASE's and 170,000 9/11 medals -- all use the same blank). This would give the mint a surplus of approx 8,000,000 silver blanks. Do you think they are stockpiling these or have you seen any US Mint cutback in demand for silver blanks? In previous years the mint has come under pressure for not producing ASE's “in quantities sufficient to meet public demand", thus having to ration sales to the public. Stockpiling a reserve in times of weak demand would only make sense, but then we are talking about a government agency with a less than stellar record in meeting that public demand.

  10. I have no idea if the US Mint is stockpiling. Even if it wasn't against our privacy rules, we are only one of the blank suppliers to the US Mint and a small one at that, so would not know what they are getting from their other suppliers.

    The Perth Mint has been stockpiling, mostly of 2013 dated coins in advance of their launch later this year.

  11. Hi Bron,
    Love the Blog and insight you provide.
    Just a quick question. Is the PMGOLD Warrant allocated or un-allocated? I'm getting a bit worried about this re-hypothecation thing going on at the moment...

  12. PMGOLD is a securitised version of our unallocated gold. We don't lend/re-hypothecate that gold, it is used in our operations just like Depository unallocated.