Response To Bix Weir Questions

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Published : January 14th, 2011
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Category : Opinions and Analysis

 

 

 

 

TREASURY VIEW

Bix Weir of Road to Roota left a comment to my previous post. This post answers his questions.

1. Metal Leasing

That section of the website is a copy of text on the old Refinery website when it was a standalone partnership between Perth Mint (40%), Newmont (40%) and Johnson Matthey (20%). The Refinery’s Treasury did some of those activities but now that we fully own the Refinery business, we don’t get involved in Leasing or Funding Facilities (there is some small consignment stock), which is why it is zero in our current annual report. Important point is that even if we did have a request from a miner or other customer to borrow gold, we would first lease in paper gold from a bullion bank and absolutely not use Depository client metal. We cannot stress this point enough and it is an overriding consideration in anything we do.

We will get that part of the website updated to explicitly confirm that any such “services” will not use Depository metal and will be funded from borrowing in metal so there is a clear segregation.

The prior annual reports do show a outward lease, but the notes to the account say that this was to the old Refinery partnership (AGR Matthey). We were prepared to lend Depository client metal to the Refinery even though it was a separate legal entity only because:

a.   We owned 40% of AGR Matthey.
b.   We had representation on the AGR Matthey Board of Directors and Audit Committee.
c.   The above gave us detailed insight into their activities and veto if we thought what they were doing was against our clients’ or Government’s interests.
d.   We had explicit undertakings from them that they would not onlend any metal lent to them, it could only be used to support their physical refinery operations.

2. Delivery Problems

Jason’s article makes a lot of outrageous conclusions, particularly in respect of the fact that we are running some type of ponzi scheme. The idea that we would NOT buy gold when clients buy from us just makes no logical sense – we are a Mint, we need physical gold for our business to operate, not paper money. I responded to a similar question in this personal
blog entry for those who wish to look at this issue in detail.

Jason’s key misunderstanding was that he held the view that our Unallocated metal was held in the form of a stockpile of bars, waiting to be shipped. This is not the case. Unallocated metal is backed, but by operational metal. Some of that may be in the form of finished coins and bars, but most is held in semi-fabricated form as work-in-progress and raw gold (400oz or 1000oz bars). As a result, if every Depository client wanted to take delivery, there would be a delay while we turned all our metal into finished product as the coin presses and other processes can only work so fast, but ultimately, every client would get his/her gold.

That is why we wrote about a “3 staged approach” on our
website that you quoted in your article. This was done before we had a bull market in gold, well before anyone even thought about the idea of there being stresses in worldwide gold market. Our objective was to be clear to clients what the risk was with Unallocated (because you don’t get something – 0% storage fee – for nothing). That risk is one of delivery delays if everyone wants physical. However, importantly, this is not the same as the risk that we don’t have the metal. Delivery delays result from production capacity limitations, not a limitation or absence of underlying metal (in our case anyway, this does not apply to all unallocated offerings from other organisations).

Having said that, we admit that in the past some deliveries to Depository clients were delayed and that is was not acceptable. We would note that the number of complaints that Jason got were said to be in the order of 20 to 40 and he was never clear about how many of those were specifically about Depository clients (to whom we have an obligation to deliver physical) versus cash customers. Compare those numbers to the total number of Depository clients at the time, which were around 6,500. That does not constitute “many, many”.

This is not to excuse any delays to Depository clients. It resulted from a lack of coordination between our Depository, retail shop and wholesale coin divisions. During that crazy time the wholesale division took orders from distributors for large quantities of coins which locked out our production capacity for a few months, without being aware of the impact of that on Depository’s obligations. As a result of that event, we have improved internal communication and instituted internal policies to prioritise Depository orders.

3. Times of Distress

The extreme “times of real trouble” you mention will put holders of partially or totally unbacked paper gold at risk. The comments above show that we do not run that sort of paper metal business. We, like our clients, are very risk adverse. We run the Depository business on the expectation that we will get a large number of sell orders or collect orders at any time.

In the scenario of large and consistent physical conversion by our Unallocated clients, our response will be to stop or heavily restrict all sales of coins and bars to non-Depository customers and direct our entire production capacity to servicing Depository client collection requests. As we delivered the gold, we would replace the gold needed for our processes with leased in gold. We are confident we will be able to handle such extreme market conditions.

We agreed that physical gold and silver are counterparty risk free, but we also understand there are investors who are not comfortable with personal storage of their precious metals. That is why we created the Depository business and take our responsibility to protect their metal seriously.




Bron Suchecki

The Perth Mint Blog

  

 

 

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SMT,

Similar question was raised on our corporate blog and our response can be found at http://www.perthmintbullion.com/Blog/Blog/11-01-14/Response_To_Bix_Weir_Questions.aspx

Bron
Hi Bron,

I posted the question on Perth Mints website but I was uncertain if you would publish it so I thought I better also post it on a public forum.

Thanks for your detailed response, as expected you did not answer a simple question which could easily be determined by looking at your own book.

I am not sure why you would respond in such a way, it's a little suspicious given that you have the information on hand.

Your response assumes that you do not know what clients have on the books with the mint in unallocated form.

Obviously the Perth Mint knows exactly how many 1oz, 2oz, & 10oz coins are in unallocated storage. The Perth Mint also knows how many 1kg bars, 100oz bars etc are in unallocated storage. The Perth Mint also knows what the breakdown is of gold, silver, and platinum.

The above information is more than enough information to determine the maximum timeframe to mint ALL products and provide an estimate timeframe to clients so they can make a better informed decision on a worst case scenario basis where everyone wants to take delivery of physical.

Afterall, the whole purpose of owning precious metals is the protect ones wealth. Failure to provide transparency is a sure sign of a ponzi scheme.

So now if you take the same approach and do some detailed analysis based on your production capacity, keeping in mind that you do in actual fact know what is on the books, could the Perth Mint determine the maximum timeframe to mint all product in unallocated accounts?

I am not trying to discredit the Perth Mint "Go", however anyone with their right mind should be asking themselves the same questions rather than taking things at face value and been ignorant.

Thanks,
Sam
Sam,

"Obviously the Perth Mint knows exactly how many 1oz, 2oz, & 10oz coins are in unallocated storage. The Perth Mint also knows how many 1kg bars, 100oz bars etc are in unallocated storage."

When you say that above information is more than enough to determine the maximum timeframe then it tells me there is some confusion about how the Perth Mint's unallocated is operated. Some clarification:

1. Unallocated clients only hold ounce balances, they do not hold or specify particular sizes of "unallocated" coins or bars. As a result, we have no information on exactly what physical form our clients may request in the future.
2. I said that SOME of the metal backing unallocated is in the form of finished coins and bars but that MOST of it is not.

Because we don't know what physical forms our clients may want and most of the metal backing their unallocated is not in those forms ready to deliver, it is not possible to determine a timeframe. This was the point of my last response.

The delivery timeframe question is two sided - you have to know what assets "are on your books" but you also have to know the exact nature of the liabilities also on your books. We only know the latter in respect of a total number of ounces, not potential physical forms.

You are either ignoring this lack of information on our part (which is what results in us being unable to estimate a timeframe) or are operating under a misunderstanding that unallocated clients in some way pre-indicate what physical form their unallocated is/should be backed by.

If the above doesn't make sense, then I don't think I'm communicating the practical operational issues we face very well. I think I'll have to come up with an appropriate analogy, which is eluding me at this time.

Regards,

Bron
SMT,

Your point about how long it would take is a good one and it would help investors evaluate whether Unallocated was appropriate for them. It would be difficult to get an accurate fix on the timeframe because it depends on the mix of products that people want - bars for example are quicker to make than coins as less processes are involved. We could try and make some assumptions around the product mix.

One thing that would restrict us on giving out that timeframe would be to what extent is it commercially sensitive and give our competitors an insight into our operations and cost structure.

We will have a look at this and see what we can do.

Bron
Bron,

Im not real familiar with the unallocated program, but I don't trust anyone holding gold and silver on my behalf, especially anyone who says they are backed by a "government". We all know how honest they are.

Thanks for giving some insights into the operations workings behind the unallocated program below.

"Some of that may be in the form of finished coins and bars, but most is held in semi-fabricated form as work-in-progress and raw gold (400oz or 1000oz bars). As a result, if every Depository client wanted to take delivery, there would be a delay while we turned all our metal into finished product as the coin presses and other processes can only work so fast, but ultimately, every client would get his/her gold."

If the program is not a ponzi scheme as you have stated, then why doesn't the Perth Mint go on record and state what the Mints production capacity is so that all your client's are clear in their minds about how long it may take (maximum timeframe) to receive delivery of their metal if there was a rush for physical?

If the Perth Mint is transparent about how much they have in the unallocated program and they are transparent about their minting capacity. Then the average person can workout the maximum timeframe to convert the "raw gold (400oz or 1000oz bars)" into coin and smaller bullion form.

Don't you think your clients are entitled to know how long it might take to receive their bullion?

Or do you believe it to be a "trade secret" like the US Federal Reserve's gold swaps program?

I look forward to your response.

Regards,
SMT


Latest comment posted for this article
Sam, "Obviously the Perth Mint knows exactly how many 1oz, 2oz, & 10oz coins are in unallocated storage. The Perth Mint also knows how many 1kg bars, 100oz bars etc are in unallocated storage." When you say that above information is more than enough to  Read more
Bron Suchecki - 1/23/2011 at 4:53 AM GMT
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