Warning About Perth Mint Gold Certificates

IGolder reports about three problems with Perth Mint gold certificates.

(emphasis mine)

The Perth Mint is Australia's oldest operating mint. The Perth Mint is owned by Gold Corporation which is wholly-owned by the State Government of Western Australia.

Perth Mint Certificate Program (PMCP)

The PMCP offers offshore storage of precious metals (gold and silver) at The Perth Mint’s vaults in Western Australia. The Perth Mint has operated continuously from the same location for well over a century. The PMCP is the only government-guaranteed, precious metals program in the world. This unique precious metals storage program is fully owned and backed by the government of Western Australia and insured by Lloyds of London.

*** Your vaulting relationship with The Perth Mint is private, protected under the Gold Corporation Act 1987 and the Perth Mint Certificate Program's administrative procedures.
*** This is the world's only Government guaranteed precious metal accumulation program.
*** The Mint is operated by Gold Corporation that is wholly owned by the Government of Western Australia.

Perth Mint Problem #1: PMCP is Paper Gold

Evidence shows that the Perth Mint is selling paper gold. After all, a certificate, by nature, is nothing more than a promise to the bearer. Owning a gold certificate is someone's promise to pay gold to you. According to James Turk, doing business with Perth Mint means you are a general creditor of Gold Corporation. For instance, in 2002, its financial statement showed that the Mint had approximately 4.5 times more debt than equity ($96.2 million of gold on hand against $234 million of liabilities). In 2006, the leverage ratio had increased above 18. For details feel free to read Is the Perth Mint telling me the whole truth?

There are numerous warnings from others, such as Jim Sinclair and Jason Hommel, regarding the Perth Mint selling paper promises.

Perth Mint Problem #2: Gold Confiscation

All countries have a confiscation risk on the basis that we are dealing with politicians. In our view, Australia has a relatively high risk of gold confiscation theft because Australian law already has a mechanism in place to require delivery of gold to the Reserve Bank of Australia (RBA). If you read Part IV of the Banking Act 1959 (the compilation was prepared on 7 July 2008, taking into account amendments up to Act No. 73 of 2008), you will notice the Governor-General may confiscate gold "for the protection of the currency or of the public credit of the Commonwealth". Section 41(1) says "A person shall not, except with the consent in writing of the Reserve Bank, take or send any gold out of Australia". Section 42(1) says "a person who has any gold in the person’s possession or under the person’s control shall deliver the gold to the Reserve Bank, or as prescribed, within one month after the gold comes into the person’s possession or under the person’s control". Section 43 says "all gold delivered in pursuance of section 42 shall thereupon vest in the Reserve Bank absolutely, free from any mortgage, charge, lien, trust or other interest in or affecting the gold". Section 44 says "the amount to be paid for any gold delivered in pursuance of section 42 shall be an amount determined in accordance with such price as is fixed and published by the Reserve Bank". Section 45(1) says "a person shall not sell or otherwise dispose of gold to a person other than the Reserve Bank or a person authorized in writing by the Reserve Bank to purchase gold; and a person, other than the Reserve Bank or a person so authorized, shall not buy or otherwise obtain gold from any person."

The Perth Mint cannot default on its allocated gold without breaking the law. Gold Corporation and the Western Australia government can default on the Perth Mint's UNallocated bullion certificates by using Perth Mint's "force majeure" clause. Read all the fine print written on the certificate, including: "The Perth Mint will not be liable or responsible for delivery delays due to causes beyond its control."

There is no need for the Government of the day to have to rush new legislation through that may attract public comment or opposition. All that is required is the Governor-General to proclaim that Part IV shall come into operation. The Governor-General is a figurehead role and is not elected. The Governor-General may dismiss the Government, as it did on 11 November 1975. It is therefore theoretically possible that the Governor-General could bring Part IV into force against the wishes of the Government if he/she thought that it was “expedient so to do, for the protection of the currency or of the public credit of the Commonwealth” (Section 40(2))

Ironically, some people argue that Gold Confiscation won't apply to the Perth Mint Certificates because these are just certificates. The government confiscating gold wants the delivery of physical gold; not paper claims. As far as iGolder is concerned, we will not chose between purchasing paper gold nor having our physical gold stolen by the government. Instead, we will buy and store our gold elsewhere.

Perth Mint Problem #3: Socialist Government

The Australian Government is running big deficits, and who knows what the next elected government may do towards the Perth Mint. Runaway inflation will be a worldwide problem, and the need to stabilize the currency will become a priority. Will the government decide to bring Part IV into force to address the issue of runaway inflation? At iGolder, we anticipate an inflationary economic depression comparable in severity and scope to the Great Depression of the 1930s. We created iGolder to provide stability and prevent the division of labor from shrinking - causing mass unemployment. Political stability is very important to us, therefore it becomes strategic to store our gold in a country having respect for private property (gold ownership). Politicians, craving for power, may promise confiscating gold to resolve the financial crisis. Of course, stealing the gold won't solve the problem, however it will probably buy a few votes to get elected.

"Democracy is two wolves and a lamb voting on what to have for lunch." (Benjamin Franklin). The scenario of a politician promising to confiscate the gold belonging to foreigners cannot be discarded.

Our Conclusion Regarding the Perth Mint Certificate Program

Given all the problems listed above, iGolder does not consider prudent to purchase Perth Mint Certificates for storing your gold. We welcome Australian businesses, as long as they are not linked to the Government. No government should be trusted. If you are relying on a government guarantee, you may be relying upon a hollow promise. We encourage you to do your own due diligence before purchasing Perth Mint Certificates.

Perth Mint Problem #4: Australia's gold reserves are in doubt

Another cause for concern with Perth Mint certificates is Australia's vanishing gold reserves. In addition to selling nearly 200 tons of gold in the twenty years, Australia's remaining 80 tonnes of gold are probably encumbered:

Finally we come to the USA Bloc. This is an amazing Table. All of America’s closest allies are SOLD OUT. Australia claims to have 80 tonnes but it is probably encumbered. The UK may still have 312 tonnes but, assuming it isn’t already encumbered, this Gold may be required to obtain currency union with the Euro zone.

My reaction: The whole point of owning gold is safety. Investing in gold in an unsafe way negates this purpose. The four problems with Perth Mint are:

1) Perth Mint sells paper gold (Paper gold refers to any investment in gold which can default). Certificates for unallocated gold (like those sold by Perth Mint) are a mint’s equivalent of a bank’s certificates of deposit (CDs), except they use gold instead of dollars (or paper other currencies) and they don’t pay interest. When a bank/mint goes under, the same thing happens to the holders of these certificates: they become general creditors, with no lien/claim upon any portion of mint/bank’s assets.

2) Australian law already has a mechanism in place to confiscation gold, by requiring delivery of gold to the Reserve Bank of Australia (RBA).

3) The Australian Government is running big deficits

4) Australia's gold reserves are in doubt

Conclusion: Avoid Perth Mint gold certificates, especially for unallocated gold (allocated gold is much safer, but still risky). There are much better and safer alternatives for investing in gold.

Eric de Carbonnel

Market Skeptics

Support Market Skeptics with a donation  : please click here

Also by Eric de Carbonnel