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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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