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.
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