WHAT OTHERS ARE THINKING

Dublin-based GoldCore recently fielded questions from investors regarding the nature of "paper gold". Some readers sought clarification as to whether Perth Mint Certificates are paper gold.

The following explanation is reposted from GoldCore blog:

“By paper gold, we do not mean Perth Mint Certificates. Perth Mint Certificates are fully backed by physical gold, silver, and platinum bullion.

By paper gold we mean gold futures, gold futures options, some gold ETFs, certain forms of unallocated gold ownership, pool accounts, contracts for difference (CFDs), spread betting contracts, gold stocks and or gold options.

Perth Mint Certificates are unlike many ways of investing or speculating in gold which are not fully backed by physical metal.
 
Another distinction is that the gold and silver bullion backing Perth Mint Certificates is not held in the banking system. Rather the Perth Mint Certificate Programme is owned and operated by The Perth Mint of Western Australia which is a AAA rated government mint.
 
The Perth Mint is owned by the Government of Western Australia and is run within very strict and ethical guidelines. The Perth Mint does not and would not contravene the law and act in a manner which would embarrass its government owner. Indeed because it is government owned it has to be absolutely scrupulous in adhering to strict business procedures.
 
For every ounce of precious metal that is sold to a client, The Perth Mint must buy a corresponding ounce in the marketplace.
 
To ensure that this policy is maintained at all times, The Perth Mint is audited rigorously by the Auditor General of Western Australia as well as by external auditors Price Waterhouse Coopers.
 
The Perth Mint holds full inventory confirmations on a quarterly basis as well as the comprehensive audits. The Perth Mint Depository programs are not permitted to, and do not, run short positions under any circumstances The Perth Mint does not lease metal out to mining or exploration companies and does not undertake precious metal derivative transactions.
 
Conclusion
 
GoldCore shares concerns about pool and unallocated accounts where it cannot be established if the operator is backing its liabilities to investors. GoldCore would advise investors to research and question any program or facility they are investing in.
 
Via Mat and the Perth Mint Certificate Programme remain two of the world's safest and securest ways of owning gold and silver offshore.

Some bullion buyers prefer private storage, others public.
 
Some bullion buyers prefer storing bullion in Via Mat London or Zurich, others Perth in Australia.
 
Due to the significant geopolitical, macroeconomic, monetary and systemic risks of today, GoldCore also strongly advise that it should not be a question of either safe third party ownership or personal possession. Both are important and complementary and both should be considered by all prudent investors and savers.

If you are not fully confident and satisfied with any of your current forms of gold ownership, the ultimate holding is outright ownership.”

BLOG WATCH

David Einhorn (president of Greenlight Capital) says US monetary policy is making the mistake of assuming that because one “Jelly Donut is a yummy mid-afternoon energy boost” then 36 must be 36 times as good.

David makes the point “that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn't giving us energy or making us feel better.”

picture: brown cardnal

The rest of the article explains how the average person reacts to Bernanke’s approach. His conclusion is that “if we didn't have a Jelly Donut monetary policy, I would sell gold, sell bonds and buy stocks. … As a result, I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio.”

Download today’s full Blog Watch (pdf 232kb) for more reviews, including:

SWISS REFINERY DEMAND MASSIVE

Egon von Greyerz (Swiss firm Matterhorn Asset Management) says that Swiss refiners are “working round the clock because demand for gold is so massive.”

WAITING FOR THE OFFER

Julian D. W. Phillips explains two techniques by which central banks (mostly eastern countries) accumulate gold without telegraphing their actions to the professional market and thus move the price.

WHERE ARE SWITZERLAND’S GOLD RESERVES?

Continuing our Swiss & central banks theme, Perth Mint Certificate Approved Dealer GoldCore report on a Bloomberg article where the Swiss National Bank (SNB) responds to calls to disclose where its gold is stored.

THE MOST BORING GOLD MARKET EVER?

BullionVault follow up on yesterday’s piece on gold market recessions with an analysis of gold’s volatility.

TREASURY VIEW

The Perth Mint is introducing a new product called Pool Allocated Silver for Depository and Certificate clients and making changes to Allocated storage fees.

The new product, which will be available from 1 May 2011, operates in a similar way to the current Unallocated silver storage option, which will be withdrawn on the same date. Pricing and other details for this and for Allocated storage fees  can be found at the end of this article.

With Unallocated silver storage, clients purchased an interest in a pool of silver used to support our refining and manufacturing businesses. We backed every investment by purchasing an equivalent amount of silver from the spot market.

The new Pool Allocated product will also be 100% backed, but by specific physical bars stored in The Perth Mint’s vaults. Clients will own a share of this pool of bars, although an individual’s holding will not relate to any specific bar.

Lists detailing the weights and numbers of these silver bars will be published daily, along with the total number of pooled bars held on behalf of clients on The Perth Mint corporate website.

We’re making the change from Unallocated to Pool Allocated because the amount of Unallocated silver we hold on behalf of clients now exceeds that required to support our business activities. We had targeted a certain amount of excess Unallocated “buffer stock” but rising insurance and other costs plus growing demand have accelerated our decision to close Unallocated.

One of the chief benefits of pooling silver bars is that it allows us to offer a low storage fee of 0.95% per annum. Pool Allocated clients will be able to convert their holdings into coins or bars for collection or to store with the Mint as Allocated.

From 1 May 2011, no new Unallocated silver accounts will be opened.  Existing Unallocated accounts will remain open and free of storage. However, clients will not be permitted to add to their unallocated balances and will only be able to sell or collect.

The Perth Mint cannot foresee reopening Unallocated silver for some time. This would only occur if we encountered significant and continued selling by existing Unallocated silver holders. We have primarily attracted buy-and-hold investors and we do not currently see, nor expect to see, any change in this regard.

At this stage Unallocated gold is not affected but it too will close at some point as gold demand also continues to be strong.

Revised Product Information Statements and Agreements will be available at http://www.perthmint.com.au/investment.aspx

Summary of pricing and other changes:

The fees below will apply to all clients, existing and new.

Trading Fees

Perth Mint Certificates are only sold through Approved Dealers, who each charge different trading fees. Clients should contact their Approved Dealer for their fees.

For direct Perth Mint Depository Program clients a 2% buy (entry) fee and 1% sell (exit) fee will apply to Australian & New Zealand clients with account balances under $50,000 AUD and International clients with accounts under $250,000 USD. No entry or exit fee applies to direct clients with account balances greater than those amounts.

Storage Fees – Allocated and Pool Allocated Holdings

Storage fees for both Allocated and Pool Allocated holdings will  be charged quarterly in advance, payable on 30 June and 31 December. There will be no refunds if selling during a quarter.

The percentage per annum rates below will apply based on the beginning of quarter market value of the metal. Existing Allocated clients have had fees based on their historical purchase value. As our insurance cost is based on current market value, this was no longer sustainable. However, in acknowledgement of the increase in metal prices our clients have enjoyed, we will reduce the percentage rates to reduce the impact.

• Allocated Gold - 1.00% (reduced from 1.5%)
• Allocated Silver - 1.90% (reduced from 2.5%)
• Allocated Platinum - 1.00% (reduced from 1.5%)
• Pool Allocated Silver - 0.95%
• Unallocated Gold – will remain free for new and existing clients
• Unallocated Silver – will remain free for existing clients only

For comparison, we note that the GLD ETFs charges 0.40% and Sprott’s Silver ETF 0.45%. We feel our Allocated gold at 1.00% and Pool Allocated Silver at 0.95% compare favourably with the ETFs when the Perth Mint’s Government Guarantee as well as the ability to take delivery in any of the Perth Mint’s coin and bar products are taken into consideration.

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EDUCATION

A reminder that Bron Suchecki, Manager, Analysis and Strategy is conducting a free seminar for first time investors in precious metals at the ANDA Coin, Note & Stamp Show in Perth on the weekend.

Bron will present ‘Options for Bullion Investment’ - an information session on the variety of ways you can buy gold and silver including coins and bars, certificate programs, storage options and even via the Australian Stock Exchange.

The seminar starts at 11.00am on Saturday 5 and Sunday 6 February at the ANDA Show, which takes place at Burswood Convention Centre. (General Admission: $10 - 1 day. Special 2 day passes available at just $15).

Bron is happy to take questions – time permitting – representing a fantastic opportunity for Western Australian bullion buyers to discuss important issues. If you don’t live this side of the
continent, don’t forget that you can watch highlights of previous presentations by Bron on The Perth Mint’s YouTube bullion channel.

Other contributors to the free seminar program include Andrew Crellin, MD, Sterling & Currency; Steele Waterman, ANDA President and MD of Waterman’s Coins & Banknotes; Rob Jackman, MD, The Rare Coin Company; and Belinda Downie, MD, Coin Works. More info.

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TREASURY VIEW

Bix Weir’s recent article SILVER: What Happens When… gets it wrong when he says that The Perth Mint’s Depository “customers cannot convert” to physical and “cash settlement may be the only option”.

Bix’s misunderstanding stems from taking the comments of the Mint’s Treasurer out of context and assuming that the statement “cannot meet all the enquiries” was about all enquiries across the diverse business units of the Mint. I can confirm that the Treasurer’s comments were only in respect of the wholesale market and not in reference to retail or Depository demand.

Usually the context or target of these sorts of newswire articles is the wholesale market. This is alluded to in the quote “the biggest demand is coming from banks and traders looking for kilo bars” but to be fair to Bix this is probably not clear, especially after journalists edit a full interview down into catchy quotes.

In actuality, the fact that the Mint cannot meet all wholesale enquiries is proof that Depository clients are protected and safe, contrary to Bix’s conclusion. The Perth Mint understands its obligations to its Depository clients and its policy is to prioritise unallocated conversions to allocated or delivery. It is only after fulfilling Depository conversion/delivery requests from its stockpiles and approximately 300 tonnes per year of new mine production that the Mint’s Treasurer will offer what is left to the wholesale market (that is, the bullion banks).

If you think about it, prioritising Depository and retail bullion sales demand is not some ethical decision but perfect commercial sense – why supply to wholesalers at lower fabrication premiums when your retail premiums are higher?

The Treasurer’s statement that “demand for our coins and medallions is strong” is alluding to our Depository and retail bullion trading demand. Since this is strong, supplies to the wholesale market are restricted and hence we are unable to “meet all the enquiries” of the bullion banks.

There are also a few other incorrect statements in the article that need clarifying.

BIX: “runs quite a large paper gold and silver operation with their unallocated pooled accounts and metal leasing operations”

Bix’s reference to “metal leasing operations” is totally without basis. If he had read a few more paragraphs down from his own quote from our website he would have found the following:

“The Perth Mint is not a bullion bank and does not provide project financing or bullion lending/derivative services to mining companies or other entities.  It does not lend client's unallocated metal to support short selling transactions or other derivative activities.  The unallocated metal is utilised solely to fund the Mint's operations.”

Can’t get any clearer than that. Furthermore, if he looked at our latest annual report, we disclose ZERO outward precious metal leases (loans).

BIX: “The business model is massively flawed because the offering entity doesn't even charge enough to cover obvious expenses like insuring metal, storing physical metal, tracking, collecting, administration”

I’m assuming Bix is referring to Unallocated here, because Allocated  storage has a 1.5% pa charge that I think anyone would be hard pressed to claim is too low. However, Bix says “charge enough”, which is a little confusing because we don’t charge ANYTHING for Unallocated storage. This is not a massively flawed business model as he claims. In fact if we did charge a fee on Unallocated for insurance and storage it would be double dipping!

This is because the costs Bix refers to are costs associated with production of our coins and bars and as a result are covered by our fabrication premiums. Before the Depository business existed we incurred these costs and customers buying our coins and bars “paid” for these costs via our fabrication premiums. Nothing has changed just because our physical operational metal is now owned by our Depository clients rather than bullion banks as it was in the past. To then claim that we need to charge Unallocated clients a fee because we have storage and insurance costs, when those costs have always been and still are covered by fabrication premiums could possibly be considered deceptive.

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EDUCATION

Solari have produced a report that will be of interest to US investors: Selected Tax Issues to Consider When Investors Move or Exchange Precious Metals Holding. In the report they consider the tax implications of some hypothetical exchanges, using the Perth Mint Certificates as an example. There are just a few points I’d like to make to clarify some of the statements made in the report. This may help investors with Perth Mint Depository Certificates or accounts by ensuring any tax advice they obtain has the additional detailed facts below. Quotes from the report will be in bold with my comments below.

Example A. Hypothetical Exchange of Unallocated Account Holding for Bullion Bars or Coins

A certificate fee and storage fees may have been paid by the investor prior to the exchange and while holding the metals in unallocated or certificate form.

Perth Mint Certificates are often equated with unallocated metals. It is important to note that clients can hold allocated metal on a Perth Mint Certificate. The Certificate is merely a warehouse receipt acknowledging the type of storage and amount held. Allocated Certificates attract storage fees, while unallocated Certificates do not.

We do not know whether the Service would make a distinction in this respect between allocated accounts and unallocated accounts, but we would argue that if the investor’s initial purchase entitled him or her to convert between allocated accounts and unallocated accounts (with or without payment of a fee, which, for purposes of determining like-kind character, should not be relevant), then the exercise of such a right does not change the "kind or character" of the investment under the like-kind exchange rules.

All Perth Mint clients have the right to convert from unallocated to allocated (or vice versa) and our view is that such “conversion” does not change the kind of character of the investment.

In respect of allocated metal, it is very important to note that such metal is explicitly held by The Perth Mint as custodian for the client and is not on the balance sheet of the Mint. The client has title to specific bars and coins segregated in our vaults from our own operational metal. As a result, our view is that when a client asks for delivery of their allocated bars or coins that they are not “converting” or “exchanging” but merely taking delivery of specific physical metal already purchased by them.

Note 8: … whereas in the case of Perth Mint, the Mint may (and probably does) “borrow” the investors’ precious metals for use in its industrial operations, so that no actual metals are held in segregated safekeeping for certificate holders

In respect of Perth Mint unallocated metal, the investor owns “… as an owner in common, and undivided interest in a pool of Commodities, which need not be stored separately so as to permit identification to the Owner and may be maintained in bulk storage on a fungible basis with the Commodities of other Owners … “ Clause 3.1(b) Conditions of Application, Perth Mint Certificate Program.

The Perth Mint is very explicit on its website that “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” and that “The Perth Mint is not a bullion bank and does not provide project financing or bullion lending/derivative services to mining companies or other entities.  It does not lend client's unallocated metal to support short selling transactions or other derivative activities.  The unallocated metal is utilised solely to fund the Mint's operations.”

The above confirms that we do, not “may”, use “investors’ precious metals for use in its industrial operations” but we would disagree with the choice of “borrow” as there is no such explicit transaction raised internally. While there may not be any segregation with Perth Mint unallocated, we feel that our operational use and 100% backing make the Mint’s unallocated materially different from other unallocated metal services, which are often true “paper” gold or silver and where the provider is not obliged to back the liability to its clients with metal and can hedge such liabilities with derivatives or futures contracts.

This distinction between Perth Mint unallocated and other unallocated services may be material in the tax treatment of “exchanges”. When investors convert Perth Mint unallocated metal into coins or bars the Mint is merely taking existing operational physical metal that was backing investor unallocated metal and fabricating it into the specific physical form the investor requires. This may make for a stronger case for a “like-kind exchange” compared to a “paper” unallocated exchange.

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