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Don’t Mistake Perth Mint Certificates For Paper Gold

Topics [ unallocated depository allocated store bullion store gold ]

DEPOSITORY SERVICES

I have a friend I’ve known ever since I first started in the gold business in 1994. I’m quite fond of him and he is ever willing to tell me what he thinks about the gold market.

He does tend to be a bit opinionated at times, which is generally not a problem, except that he often gets his facts wrong and doesn’t like it when I correct him. He also has a penchant for conspiracy theories and can tend to be a bit irrational, but he is always entertaining. You may wonder why I bother associating with him.

Well, you may be surprised to know that you are friendly with him as well.

His name is Mister Internet.

Paper gold is one of Mr. Internet’s favourite topics. I made the mistake of asking him about it the other day:

“Oh you don’t want anything to do with paper gold. Don’t you know, all the bullion banks are leveraged 100:1 and the fractional backed system is going to default and crash any day, so you should only hold allocated. But wait, I did hear some stories of unnamed people who have had unnamed banks refuse or delay giving them their allocated, so maybe that is not safe either? I suppose they are right when they say ‘if you don’t hold it, you don’t own it’. But then you have to worry about it getting stolen, especially if you have more than just a few ounces. In that case …”

I had to cut Mr. Internet off there, as he starting rambling on about “midnight gardening”, and putting a metal pipe above your buried “stash” in your backyard to confuse metal detectors, and using decoy safes and so on.

It’s enough to make any Perth Mint Certificate holder question their decision to hold precious metal with the Perth Mint.

I understand where Mr. Internet is coming from. Banks appear to be involved in scandals on a regular basis and MF Global made people question the idea that client funds can’t be touched. It all resulted in a loss of trust.

And if you are not comfortable with the risks of personally storing gold and silver (and nothing is free of risk), then it very much comes down to a question of trusting the person holding your precious metal.

But there is a big difference between paper gold accounts with a bank and a Perth Mint Certificate, which just happens to be made out of paper.

Mr. Internet is right about banks operating fractional reserve precious metal accounts, even if his figures are wrong. Jeffery Christian of consultancy CPM Group confirms that bullion banks loan up to 10 times as much metal as they have on deposit (with AIG going as far as 40 times).

This should come as no surprise - they are banks after all - and lending out your deposit is what banks do. No one expects a normal bank to have a vault full of dollar bills backing their deposit liabilities one for one. Neither do bullion banks.

"The Perth Mint, however, is not a bank.
We do back our deposit liabilities one for one
with real gold and silver."

The Perth Mint, however, is not a bank. We do back our deposit liabilities one for one with real gold and silver. We don’t lend client metal, we don’t speculate on the price, and we don’t get involved in risky derivative transactions. We are a simple refinery and mint business, turning mined gold and silver into bars and coins for investors.

Even though the Perth Mint isn’t involved in banking activities, Mr. Internet has on occasion accused us of not backing our unallocated accounts, saying that we just take people’s money and don’t buy any gold. My appeals to our internal and external audits, plus oversight by the Auditor General of Western Australia and the Treasury department of Government (additional supervision no public company is subject to), often don’t assuage his fears.

In that case I ask Mr. Internet to think it through logically. To refine, mint and ship $13 billion of gold around the world each year we need a lot of metal in our refinery, factory and vaults. Without gold we can’t make anything – we don’t have a business. We don’t care for dollars, we need gold. So there is no incentive for us to keep investors’ money and not buy gold: the more gold we have the more coins we can make. The fact is we have every incentive to NOT hold dollars.

We are more than happy to sell our bars and coins to those who feel better holding it themselves, and that is our main line of business. But we created the Perth Mint Certificate Program for those who wanted the option of a safe offshore storage facility.

We take that responsibility quite seriously. Whether you hold unallocated, pool allocated, or allocated, you can be sure that while your Perth Mint Certificates may be made out of high quality security paper, they certainly aren’t “paper gold”.

P.S. – Mr. Internet is a plagiarism of Benjamin Graham’s (the father of value investing) Mr. Market – “a fellow who turns up every day at the stock holder's door offering to buy or sell his shares at a different price. Usually, the price quoted by Mr. Market seems plausible, but occasionally it is ridiculous.” (Apologies to Mr. Graham for my poor copy of his allegory).

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