Understanding Unallocated

EDUCATION

There is a great deal of misunderstanding about The Perth Mint Depository’s unallocated storage. This recent comment on a forum sums up the confusion:

“all their bullion is owned by people who have it in their depository... still trying to figure out how they can sell bullion that belongs to others.”

The Perth Mint website defines unallocated storage thus: “With unallocated storage… clients purchase an interest in a pool of precious metal held by The Perth Mint. The Mint purchases an ounce of precious metal from the spot market for every unallocated ounce it sells to clients. Accordingly every unallocated ounce is 100% backed.”

To clarify this further, I have come up with the following analogy in an effort to minimize continued misunderstanding.

A water utility pumps water from a dam and through a lot of pipes supplies it to your house where you drink it. As water is coming out at one end, it is continuously being pumped in at the other end, so the pipes are always “full”. Therefore, it is possible to measure and calculate how many litres or gallons of water are in the pipes at all times.

Because the water is constantly flowing through the pipes, it is not possible to specifically identify the individual water molecules in the pipes as they are changing from one day to the next. Contrast it with talking about water in a bottle. The individual water molecules in the bottle today will still be in the bottle tomorrow.

The Perth Mint’s unallocated storage can be best explained by saying that we are selling you the water in the pipes. Allocated is like selling you water in a bottle. It might make more sense to make the following substitutions in the text above:

Water utility = Perth Mint
Pumps = acquires
Water = precious metals
Dam = miner
Pipes = operations
Drink = store

With a few minor amendments to the phrasing, it would read like this:

The Perth Mint acquires precious metals from a miner and through a lot of operations supplies it to your house where you store it. As precious metal is coming out at one end, it is continuously being acquired in at the other end, so the operations are always “full”. Therefore, it is possible to measure and calculate how many ounces of precious metals are in the operations at all times.

Because the precious metal is continuously flowing through the operations, it is not possible to specifically identify individual precious metal molecules in the operations as they are changing from one day to the next. Contrast it with talking about precious metal in a bottle. The individual precious metal molecules in the bottle today will still be in the bottle tomorrow.

The confusion by the commenter I quoted above is that he is thinking of the Mint’s unallocated storage in terms of static, specific bits of precious metals in our operations. So when we sell a coin, he thinks of it as us selling a bit of precious metal that belongs to Depository clients.

It is more accurate to think of the Mint’s unallocated storage not as STATIC blob of precious metal, but as a FLOW of precious metal.

We use the word “unallocated” because we can’t point to specific molecules of precious metals in our operations and say they belong to our clients – they are always “flowing”. Allocated is different because we pick out (allocate) specific precious metals from the flow and put it aside on a shelf.

Even though unallocated “flows”, because we immediately buy precious metal to replace what we sell, clients can be reassured that the “pipes” are always full (in other words, 100% backed at all times).

Important note: many unallocated “programs” (particularly ones operated by banks) do not operate as I have described above. They may only store a fractional amount and lend out the rest. The Perth Mint does not do this.

Bron Suchecki