Another addition to the ultracrepidarian
files. See this Kitco forum topic about the Mint raising yet again that you can't
trust the Mint's unallocated. My reply below:
In the latest
annual report on their
website it states a figure of AUD 1.387 billion worth of metal in its
Depository/Certificate programs (note 26b on page 38). There is no split
between gold and silver.
Silverthorn is correct about not going broke,
minting has to be one of the few counter-cyclical industries (which is why I
am happy working there), although to be correct it is not the Mint you have
to worry about going broke but the West Australian government, as the Mint is
owned and guaranteed by the government.
As for the naysayers,
the issue is not the profitability of the Mint or solvency of the government
but the belief that the Mint does not have the metal to back its liabilities.
What they say is that the Mint takes your money and doesn't buy the metal. It
then has ounce denominated liabilities that in dollar terms could increase
dramatically if metal price went up but only have a fixed dollar amount in
cash against that increasing liability. Then when clients come to sell or
collect metal, the Mint will not have enough cash to pay out at the then
higher market prices or have the metal for collection.
Now even the Mint's
biggest critics would admit that it and AGR Matthey (where a fair amount of
the metal is held) must have some physical metal lying around. Considering
that Australia produces 250 tonnes a year and all of that goes through AGR Matthey and the Mint made 8.1
million blanks (page 14 of annual report, this number includes blanks used by
the Mint for its own coins), I think a conservative case can be made that
there must be $387 million worth of metal at least. So according to the
naysayers there would be $1b exposure. But the accusation is that the Mint
got money for this but did not buy the metal, so how much cash would it have?
If you look at past
annual reports you'll see that most of the Depository's growth occurred in
the past few years. So lets assume that the average
buy in price has been AUD 500 per ounce, or half of the current price. This
would mean that the Mint would have half of the $1b exposure in cash, or
So if the gold price
doubles (which I think most would be happy with), then the $1b turns into $2b
exposure with only $500m in cash so the Mint will out of the money by AUD
1.5b. This is a big number but in my opinion not enough to break the West
Australian government considering it has the power to tax. For example, if it
decided to levy a 0.5% royalty on gold for 5 years that would give 250t x
32015oz/t x $2000/oz x 0.5% x 5 = $400 million.
Anyway, the question is
why would the government do it? The only benefit they would get is not having
to borrow $500m, because they use the $500m that Depository investors gave
the Mint instead of buying gold. At an interest rate of 6% that means that
the government saved a huge $30m. Compare that to the government's budgeted
expenses of approx $18b.
So the naysayers think
that it is reasonable that the government would think it is a good idea to
risk $1.5b to save $30m a year, so their expenses can be reduced from $1800m
to $1770m? Oh, yes and since we have just had a change of government, the new
premier and cabinet would also agree that it is smart to continue to carry a
$500m shortfall (which could become a $1.5b shortfall) to save $30m a year
instead of taking the hit and revealing it, which would do so much damage
their political opponents that they would be guaranteed the next couple of
OK, so I think most
people would agree that you would have to be taking drugs to think that the
above is a likely scenario. So that then leaves the explanation that the
Mint’s management is hiding this from government. Why would they do
this? Well the only plausible motivation is money, or in other words boost
profits so you get paid a big bonus. But then if you look at the past annual
reports you don’t see any huge $30m profits and if you look at page 39
(the page all the staff check out each year) you’ll see that one
director earns between $390-400k, which is the CEO (as he is also a
director). Last year it was $370-380k, so no massive bonus. So do you think
it is reasonable that the CEO would allow a $500m exposure for no personal
So then the last
explanation must be that the CEO and a few others have fraudulently siphoned
off the $30m a year. But for this to be true you then have to believe that 4
different auditing teams (the internal and external auditors of both the Mint
and AGR Matthey) are either 1) so incompetent that they could not find a
$500m hole in the accounts or 2) that they are all part of the fraud and have
been paid off. Oh, yes and this would include the Auditor General of the
government and that this has been going on for a number of years and
continued through the rotation of those 4 auditing teams during that time and
of course the cooperation of the accounting staff and CFOs of both organisations and that not one of any of those persons
involved would whistleblow any of it.
Does any of that sound
reasonable or likely to you?
In response to that, vespuce asked:
On your post I would
counter the following:
1) Assume liability of
$1bn, fine, but we don't know how much of that is silver, or how high the
price could spike. You suggest a doubling of price, wheres
the risk is far greater. Let's say 80% silver, 20% gold, and the dollar
collapses - silver could quickly move to over $100/oz. PM would be underwater
by $7.6bn on just the silver. The point is, perths
(or anyone elses) unhedged
exposure is infinite in fiat terms.
The rest of the points
may be not be relevant, because I think you started with a false premise (ie the potential exposure).
2) Why would government
try to save just 6% on $500m (with unlimited exposure) when they have $18bn
budget? I say why wouldn't they. First we know they are not rational and
efficient institutions. And more importantly it would be another $500m channelled away from the physical gold and silver
3) You say the incumbent
governemnt would spill the beans on any discovery
of the unhedged exposure? I dont
accept this for one second. Most would be oblivious. There are much bigger
dirty secrets going on. I really wouldn't underestimate governments
ignorance, stupidity or ability to deceive.
4) Reliance on auditors?
Two words, Aurther Anderson.
My reply to that was:
vespuce, thanks for the counter
arguments, best way to work out all the angles and test one's case.
I only assumed a
doubling to be conservative. You are correct, the exposure in infinite, but
would this not make it only more ludicrous that anyone would take on such an
exposure to only save $30m in interest? The bigger you assume the exposure,
the more unrealistic that anyone would do it.
As inefficient and
incompetent governments can be, I still don't think they would take on such a
risk for such a small return. You sort of implicitly acknowledge this by raising
the "more important" reason of suppressing the price.
Firstly, lets assume that all of the $500m is gold. At $500/oz (ie average price clients "think" the Mint
bought metal for them), that is only 31t over say 3 years or 10t a year that
has been "channelled away" from a market
where total world production is 2500t. If you compare that to trading volumes
it is even more pathetic. 10t a year is not going to move the price, so why
Secondly, the Mint is
not the Reserve Bank of Australia or controlled by the Federal Government,
who are the ones in charge of fiat currencies and therefore interested in
managing currencies (one of which IMO is gold and silver). The Mint is owned
by the West Australian government, and West Australia has a big gold mining
industry and these people vote, so why try to depress the price which will
only make people unemployed and hurt royalty revenues as well
As to your third point,
I can't really say much except that they aren't as ignorant or stupid as you
believe. It is somewhat of a trite statement. I have met the officials from
the Auditor General and also the three Government representatives we have had
on the Board (they are appointed by the Government to keep and eye on us) and they are intelligent and honest
people. For example, John Langoulant, who was on
the Mint's Board for many years while he was WA's Under Treasurer, recently resigned as CEO of the WA Chamber of Commerce and Industry
to become CEO of media mogul Kerry Stokes' Australian Capital Equity. Kerry
Stokes is one of Australia's top 10 richest persons and circa #700 in the world. You think Kerry is going to employ someone
"ignorant and stupid"?
Auditors - again I would
assert that this is a trite statement. Usually auditor scandals relate to
suspect interpretations or valuations of unclear financial instruments or
other activities. What we are talking about here is a very simple fraud. If
you look at page 21 of the Mint's annual report you will see that it says
there is $751m of precious metal INVENTORY and $1,080m of leases to AGR held
as INVENTORY. I would put to you that the word "inventory" is not
subject to much interpretation for an auditor. If the Mint kept $500m in cash
and didn't buy the metal then I would argue that it is highly unlikely that
an auditor would be that incompetent that they could be deceived that there
was $1831m of inventory instead of only $387m and not find traces of the
$500m in cash we received instead of only the $23m in cash reported in the
annual report. I suppose then that our bankers Westpac and JP Morgan (OK I
suppose they would be in on any scam as no goldbug
trusts them ) were in cahoots to divert the cash from the auditors.
auditing teams have at least rotated once, so I think that would cover most
of the top tier firms. One or two stupid or corrupt auditors, I suppose, but
all of them, over many years?
This really then leaves
incompetence or conspiracy by all these people:
1. Two internal auditing
teams of say 4 people each rotated once - 16 people
2. Two external auditing
teams of say 5 people each rotated once - 20 people
3. CEO, CFO, group
accountant, finance manager, accountant and settlements person in each organisation to dodge the books - 12 people
4. Me and Treasurer and
similar executives at AGR - 4 people
5. You would need at
least three people at the two banks to pull off the misdirection of $500m and
probably more, but lets say 6 people
6. Board Directors of
both organisations, with changes over 3 years, say
7. Auditor General and
one other official - 2 people
8. Minister and Premier
- 2 people
Now I'll be generous and
say that you don't need all of these to be involved in the conspiracy, but
then you need those that aren't to be incompetent. So 82 people all up and
for what? To save $30m in interest and take 10t of demand off the market per
I just don't consider
any of that realistic. It can only make sense if there is something to be
gained and that gain is worth the risk. Do you think a criminal will steal a
30 year of car in front of a police station or a new car in a back alley?
$30m and 10t a year is like a 30 year old car in terms of the (non) impact it
would have, so why do it?
The focus of the above comments are on the idea that the Mint's unallocated
is a scam. I should point out that by doing so I'm not trying to convince
anyone that storing with someone else is the only way to go. I understand all
the reasons for self storage and if that is what you feel safer with, then
great. But there are other people to whom the risks of self storage are
perceived as higher than trusting someone else with it. The Mint doesn't
really care one way or another whether you like the storage or not because we
sell both storage and physical bullion (and are flat out doing so right now),
we can make money no matter what view you hold.
When people attack the Mint, it is worth asking if they are a competitor of
the Mint. I have found that usually they are either those selling storage
services themselves or selling only physical bullion. My view is that the
Mint's free unallocated storage/physical metal in operations business model
is far too competitive against these, I mean how can you compete against free
storage? Therefore they only way they can compete is to sow doubts about
unallocated and the Mint.
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint as an Administration
Officer in their Sydney retail outlet. In 1998 he moved to Perth to work in
the then fledgling Depository division. He has held a number of roles since then
in the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth Mint in any way.