29 July 2012

Shortage followup questions

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


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.


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?


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.


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.


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.


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.


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).


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 ?


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.


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.


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.


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


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.


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.


  1. What if the scenario of hyperinflation comes into play and the the dollar collapses?
    Say at the beginning silver gets to $100 per ounce, then $200, then $400, then $800, and this is happening on a month by month basis. This would promote stages of panic and people will try to purchase coinage before the dollar collapses.
    So in the initial stages the Perth Mint will be maxed out trying to keep up with demand.

    After the initial stages of hyperinflation, will the Perth Mint continue to produce irrelevant on how high silver goes to or stop producing with the knowledge that it would be crazy to accept worthless dollars?

    Another question, there is a lot of people saying silver is rarer than gold. 1 billion ounces of above ground silver compared to 7 billion ounces of above ground gold. Will silver become more valuable than gold?
    How would each rate against each other either as a commodity or as real money in the future?

  2. As soon as we sell we buy, so as long as we can buy replacement gold with those hyper inflated dollars, we will see gold in those dollars.

    Something can be very rare and still have little value, if no one wants it, it has little value. So I'm not big on the rarity argument.

    I've seen reported "stock" for silver at 1.9 billion ounces.

  3. When you sell a ounce for $1000, and then you buy but the price has jumped to $2000, I dont think you will be selling in a hyperinflation scenario, it wont work. I think the perth mint will say we cant take orders and close the doors until it blows over.

    Isnt that the point of gold being so valuable because of its rarity?
    & each person in the world can recognise it and be able to trade with, with the knowledge of set limit that cannot exceed, without labouring for it. (unlike printing presses)

    This I beleive is common rarity between 2 significant historical metals. Unlike a rarity of a 10 gram copper 1 penny coin from the 1930's valued at $1,500,000.00, which is total hype and beyond sanity.

    & the tragic aspect to silver is as you say if no wants it, it has little value, and is currently at 50:1 g/s price ratio, then why would anyone want gold?

  4. The time difference between us selling and then buying is measured in seconds, so we may still be able to trade in dollars.

    I think the problem will be that there will just be a tipping point beyond which people will not want to sell gold for dollars.

    Gold has value because it is not rare - there is 170,000t of stock against 2,500t of annual mine supply.

    There are a lot of other commodities more rare than gold which trade at a price lower than gold.

  5. It is rare to the general public if the gold is hoarded by the elite and the central banks.
    Not rare to you as you have access to tonnes of it.

    Even though you could make 170,000 1 tonne gold coins which would be a 20km stack, still it is only one ounce per person in the world. With gold being hoarded it would be a fraction of an ounce per person in the world. And if there is a need to use gold as money it would be extremely difficult to circulate as currency. With the shortage of silver even more so.

    You can google is gold rare, it really comes down on how you define rare.

    As you say, There are a lot of other commodities more rare than gold which trade at a price lower than gold. But if gold was treated as a commodity its price would be a lot lower (as it was only traded at $300 a few years back), but at this present moment it is treated as of monetary value with the fear of the dollar collapsing.

  6. Hi Bron, with regards to the PMGOLD warrant on the ASX. Is the gold allocated or un-allocated? I've looked at the PDS and around but can't find a definitive answer.

  7. On page 5 it says "although you have no interest in or ownership of the gold underlying your PMGs"

    PMGOLD is just a securitised version of our unallocated.

  8. Thanks Bron, My main concern is rehypothecation. It's been discussed extensively on Zerohedge and TFMetals which you frequent. From what I can understand when everyone starts asking for "delivery" there will be a run. Could you maybe write a detailed blog on this? What I'm referring to is, for example, apparently a lot of Gold/Silver ETF's don't actually hold the actual phys. Could you also elaborate on what you mean by "securitised version of our unallocated?"
    Many Thanks, and keep up the great educational Blog.

  9. I don't subscribe to the "ETFs don't have the metal" theory, see http://www.screwtapefiles.blogspot.com.au/2012/09/slv-database-3.html for some facts.

    The run, if it happens, will be on bullion bank fractional unallocated accounts. I say "if it happens" because this requires paper traders to "get religion" and decide they want physical and I'm not sure that will come easily.

    By "securitised" I just meant the creation of a security that trades on the ASX, not in the sense of a security that is sold/rehypothecated.

    Perth Mint unallocated and PMGOLD are fully backed products where we use the metal in our operations. A materially different thing to fractional unallocated as offered by a bank (who by definition are in the business of lending).

  10. Thanks Bron, See Silver Stackers forum. [Cost Index]

  11. Sorry if this is a bit off-topic, but I was wondering if anyone knows why PMGOLD doesn't show up in most stockmarket apps (including the official ASX app) or even Yahoo Finance?

    Even searching for PMGOLD.AX always returns no results.

    Other symbols like QAU.AX and GOLD.AX appear just fine.

    Am I using the wrong symbol for PMGOLD?

  12. Can you send me a link to a page where PMGOLD.AX doesn't work, I'll take it up with the ASX. PMGOLD is listed under the same platform (AQUA) as GOLD so should show up.

  13. Just noticed that the ASX website does indeed return data for PMGOLD, so I have no idea why the official ASX iPhone app doesn't:

    Here's a screenshot of the ASX app showing no result:

  14. ASX say that this is a known problem at the moment with no structured products being picked up. Their IT team is working with the vendor to rectify it.

  15. Thanks again Bron, good to know they're looking into it!

  16. Still can't pick up PMGOLD on iPhone apps...