Warning About Perth Mint Gold Certificates

IGolder reports about three problems with Perth Mint gold certificates.

(emphasis mine)

The Perth Mint is Australia's oldest operating mint. The Perth Mint is owned by Gold Corporation which is wholly-owned by the State Government of Western Australia.

Perth Mint Certificate Program (PMCP)

The PMCP offers offshore storage of precious metals (gold and silver) at The Perth Mint's vaults in Western Australia. The Perth Mint has operated continuously from the same location for well over a century. The PMCP is the only government-guaranteed, precious metals program in the world. This unique precious metals storage program is fully owned and backed by the government of Western Australia and insured by Lloyds of London.

*** Your vaulting relationship with The Perth Mint is private, protected under the Gold Corporation Act 1987 and the Perth Mint Certificate Program's administrative procedures.
*** This is the world's only Government guaranteed precious metal accumulation program.
*** The Mint is operated by Gold Corporation that is wholly owned by the Government of Western Australia.

Perth Mint Problem #1: PMCP is Paper Gold

Evidence shows that the Perth Mint is selling paper gold. After all, a certificate, by nature, is nothing more than a promise to the bearer. Owning a gold certificate is someone's promise to pay gold to you. According to James Turk, doing business with Perth Mint means you are a general creditor of Gold Corporation. For instance, in 2002, its financial statement showed that the Mint had approximately 4.5 times more debt than equity ($96.2 million of gold on hand against $234 million of liabilities). In 2006, the leverage ratio had increased above 18. For details feel free to read Is the Perth Mint telling me the whole truth?


Year

Perth Mint Leverage Ratio

Gold Available for Redemption

Paper Gold

2000

3.65

27.4%

72.6%

2001

4.83

20.7%

79.3%

2002

4.61

21.7%

78.3%

2003

8.85

11.3%

88.7%

2004

10.36

9.7%

90.3%

2005

11.38

8.8%

91.2%

2006

18.18

5.5%

94.5%


There are numerous warnings from others, such as Jim Sinclair and Jason Hommel, regarding the Perth Mint selling paper promises.

Perth Mint Problem #2: Gold Confiscation

All countries have a confiscation risk on the basis that we are dealing with politicians. In our view, Australia has a relatively high risk of gold confiscation theft because Australian law already has a mechanism in place to require delivery of gold to the Reserve Bank of Au stralia (RBA). If you read Part IV of the Banking Act 1959 (the compilation was prepared on 7 July 2008, taking into account amendments up to Act No. 73 of 2008), you will notice the Governor-General may confiscate gold "for the protection of the currency or of the public credit of the Commonwealth". Section 41(1) says "A person shall not, except with the consent in writing of the Reserve Bank, take or send any gold out of Australia". Section 42(1) says "a person who has any gold in the person's possession or under the person's control shall deliver the gold to the Reserve Bank, or as prescribed, within one month after the gold comes into the person's possession or under the person's control". Section 43 says "all gold delivered in pursuance of section 42 shall thereupon vest in the Reserve Bank absolutely, free from any mortgage, charge, lien, trust or other interest in or affecting the gold". Section 44 says "the amount to be paid for any gold delivered in pursuance of section 42 shall be an amount determined in accordance with such price as is fixed and published by the Reserve Bank". Section 45(1) says "a person shall not sell or otherwise dispose of gold to a person other than the Reserve Bank or a person authorized in writing by the Reserve Bank to purchase gold; and a person, other than the Reserve Bank or a person so authorized, shall not buy or otherwise obtain gold from any person."

The Perth Mint cannot default on its allocated gold without breaking the law.
Gold Corporation and the Western Australia government can default on the Perth Mint's UNallocated bullion certificates by using Perth Mint's "force majeure" clause. Read all the fine print written on the certificate, including: "The Perth Mint will not be liable or responsible for delivery delays due to causes beyond its control."

There is no need for the Government of the day to have to rush new legislation through that may attract public comment or opposition. All that is required is the Governor-General to proclaim that Part IV shall come into operation. The Governor-General is a figurehead role and is not elected. The Governor-General may dismiss the Government, as it did on 11 November 1975. It is therefore theoretically possible that the Governor-General could bring Part IV into force against the wishes of the Government if he/she thought that it was "expedient so to do, for the protection of the currency or of the public credit of the Commonwealth" (Section 40(2))

Ironically, some people argue that Gold Confiscation won't apply to the Perth Mint Certificates because these are just certificates. The government confiscating gold wants the delivery of physical gold; not paper claims. As far as iGolder is concerned, we will not chose between purchasing paper gold nor having our physical gold stolen by the government. Instead, we will buy and store our gold elsewhere.

Perth Mint Problem #3: Socialist Government

The Australian Government is running big deficits, and who knows what the next elected government may do towards the Perth Mint. Runaway inflation will be a worldwide problem, and the need to stabilize the currency will become a priority. Will the government decide to bring Part IV into force to address the issue of runaway inflation? At iGolder, we anticipate an inflationary economic depression comparable in severity and scope to the Great Depression of the 1930s. We created iGolder to provide stability and prevent the division of labor from shrinking - causing mass unemployment. Political stability is very important to us, therefore it becomes strategic to store our gold in a country having respect for private property (gold ownership). Politicians, craving for power, may promise confiscating gold to resolve the financial crisis. Of course, stealing the gold won't solve the problem, however it will probably buy a few votes to get elected.

"Democracy is two wolves and a lamb voting on what to have for lunch." (Benjamin Franklin).
The scenario of a politician promising to confiscate the gold belonging to foreigners cannot be discarded.

Our Conclusion Regarding the Perth Mint Certificate Program

Given all the problems listed above, iGolder does not consider prudent to purchase Perth Mint Certificates for storing your gold. We welcome Australian businesses, as long as they are not linked to the Government. No government should be trusted. If you are relying on a government guarantee, you may be relying upon a hollow promise. We encourage you to do your own due diligence before purchasing Perth Mint Certificates.

Perth Mint Problem #4: Australia's gold reserves are in doubt

Another cause for concern with Perth Mint certificates is Australia's vanishing gold reserves. In addition to selling nearly 200 tons of gold in the twenty years, Australia's remaining 80 tonnes of gold are probably encumbered:




Finally we come to the USA Bloc. This is an amazing Table.
All of America's closest allies are SOLD OUT. Australia claims to have 80 tonnes but it is probably encumbered. The UK may still have 312 tonnes but, assuming it isn't already encumbered, this Gold may be required to obtain currency union with the Euro zone.

My reaction: The whole point of owning gold is safety. Investing in gold in an unsafe way negates this purpose. The four problems with Perth Mint are:

1) Perth Mint sells paper gold (Paper go ld refers to any investment in gold which can default). Certificates for unallocated gold (like those sold by Perth Mint) are a mint's equivalent of a bank's certificates of deposit (CDs), except they use gold instead of dollars (or paper other currencies) and they don't pay interest. When a bank/mint goes under, the same thing happens to the holders of these certificates: they become general creditors, with no lien/claim upon any portion of mint/bank's assets.

2) Australian law already has a mechanism in place to confiscation gold, by requiring delivery of gold to the Reserve Bank of Australia (RBA).

3) The Australian Government is running big deficits

4) Australia's gold reserves are in doubt

Conclusion: Avoid Perth Mint gold certificates, especially for unallocated gold (allocated gold is much safer, but still risky). There are much better and safer alternatives for investing in gold.

This entry was posted in Attractive_Investments, Background_Info, Currency_Collapse, Gold, Market_Skepticism. Bookmark the permalink.

21 Responses to Warning About Perth Mint Gold Certificates

  1. Anonymous says:

    Hi Eric,

    Your blog has become a daily addiction. I am always impressed by your ability to spot relevant but contrarian trends, your research (all the articles you comment on), your own analyses & great grasp of macroeconomics / monetary principles.

    I got confidence in gold investments after getting the macroeconomic cues from your blog (had done some research on my own, but wasn't sure) and am happy I did so.

    Being in India, I have tried to diversify by investing in physical coins and a local Gold ETF. [Wife has gold jewellery, but that is considered off limits and not an investment! Both of us wonder what the other sees in their preferred mode of holding gold :-)]

    What are your views on Gold held under bailment like BullionVault for example? I am seriously thinking of investing now considering that I expect the Indian Rupee to weaken in future. But I will have to go through a lot of bureaucratic procedures for foreign exchange transfer. If gold held under bailment possesses the same counterparty risks, I might stick to the local investment channels.

    Regards,
    Pinakin

  2. Bowtie says:

    What about CEF and GTU?

  3. Anonymous says:

    What about Bullion Vault? It seems safe to me, specially the Gold stored in Switzerland, in the International zone, and very convenient. What is your opinion?
    By the way, currently you run the most interesting blog on the web, I do not always agree with you fully but you are creative and always interesting to follow. Thanks!
    Edu

  4. Anonymous says:

    Eric,

    Thank you for the research into the Perth mint. I always thought that mint had a "one to one" ratio in claims to supply, boy was I wrong. Its just as corrupt as the fractional reserve banking system we have, its a different form of fiat.

  5. Anonymous says:

    Eric,

    Thank you for a great analysis. I almost participated in Perth Mint, since it was recommended by Peter Schiff and Robert Prechter. However, I had a feeling that it was on shaky grounds to only be holding a piece of paper. What do you think about goldmoney.com? I read that it's secured and safe. Again, I am wary when these claims are made when it involves money. I'm sure people felt safe investing their money with Madoff and Stanford at one point.

  6. Anonymous says:

    I'm a very happy customer of Perth Mint. I have been for over 9 years. I used allocated and unallocated bullion.

    Honestly, in a few years, after the shit has hit the fan, and we've seen lots of crap come down, it is going to be kind of funny to see how lots of people were mislead by some well meaning people in the Internet world. By this I mean: Most of what you worriers worry about is just useless worry.

    I'm extremely confident my gold will be in Perth Mints vaults. However, I also diversify. Better safe than sorry. LOL

  7. Anonymous says:

    Some people are confidant in the face of serious, and unanswered, questions. The points raised on igolder are very worrying, and if you're not worried, you don't understand it clearly enough.

    Our entire financial system is cratering. Holding physical gold and silver isn't an 'investment', it's insurance. More and more people are realising this, and when the number of people reaches that magical number, the availability of precious metals is going to disappear.

    People simply don't understand the monetary effect that is in the pipelines.

    Pi

  8. Anonymous said...
    What are your views on Gold held under bailment like BullionVault for example?

    I view both goldmoney and BullionVault as safe (their physical gold is audited). I don't really like their storage fees, but in terms of safety, there is no problem.

    ---------

    Free Marketeer said...
    What about CEF and GTU?

    ---------

    Anonymous said...
    What about Bullion Vault?

    goldmoney and BullionVault as safe and audited.

    ---------

    Anonymous said...
    Eric,

    Thank you for the research into the Perth mint. I always thought that mint had a "one to one" ratio in claims to supply, boy was I wrong. Its just as corrupt as the fractional reserve banking system we have, its a different form of fiat.

    Actually, it is more corrupt than the fractional reserve banking system because banks don't have to hold ANY reserves for their paper gold certificates.

    ---------

    Anonymous said...
    What do you think about goldmoney.com?

    goldmoney and BullionVault as safe and audited.

    ---------

    Anonymous said...
    I'm a very happy customer of Perth Mint. I have been for over 9 years. I used allocated and unallocated bullion.

    Investors around the world have been using unallocated gold certificates for decades, but this meants nothing. Of course, everythings going to be ok during the good times. However, now that the world's financial system is insolvent, unallocated gold is unacceptably risky.

    it is going to be kind of funny to see how lots of people were mislead by some well meaning people in the Internet world. By this I mean: Most of what you worriers worry about is just useless worry.

    Useless worry? I am pointing out that has unallocated gold has CREDIT RISKS. In other words, if the issuing institution goes under, investors in unallocated gold will experience severe or complete losses.

    Are you one of those believes that the financial system is not insolvent?

    ---------

    Anonymous said...
    People simply don't understand the monetary effect that is in the pipelines.

    Agreed.

  9. Anonymous says:

    Perth Mint "liabilities" are actually the client held precious metals. The liabilities cannot be an asset, for they are taken out of the "asset" collumn and placed in the client´s name therefore becomming a liability to the Perth Mint. You show a liability collumn larger than the asset collumn, that´s basic accounting. Over 2 billion in precious metals storage, audited by; the Perth Mint, Western Australian Government, Lloyd´s of London (who insure client´s holdings at 100%), and price Waterhouse Coopers (independanly). 109 years of continuous operation without a Hitch, low fees, annonymity & security, How do I know? second generation PMCP holder, and yes I have been there. So instead of doing a "hack job" and sidestepping reality, you need to get your facts straightened out; all Perth Mint certificates and client holdings are protected by the Gold corporation act of 1987, which trumps any previous laws- this was instilled by the Perth Mint to protect clients´holdings. Gold Money? they act like a bank, therefore they are regulated like a bank (need I say more?), dogpile of hidden junk fees, and only PARTIALLY INSURED (according to the Gold Money website, which shows their policy). So if you are making such claims, i can tell you are mis-leading people and not reading the Perth Mint website that spells this all out for you. I really question your intent here, or the intent of the people who slid this pile of misinformation under your door, which smells of questionable intent. -GoldBull62

  10. Anonymous says:

    Hey Eric, your numbers are incorrect, Perth Mint refined over 400 tonnes of gold in EACH of the last three years, check Wikipedia or the Perth Mint Website! You are talking about them refining 200 tonnes and then saying there is only 80 left? This is Extremely faulty research and very misleading. No shrimp on the barbie for you!

  11. Anonymous says:

    The Reserve Bank of Australia sold 167 tonnes in 1997.

    I'm not sure I follow the reasoning as to why the low amount of current gold reserves or whether it has been leased out has something to do with the Certificates. The Perth Mint is owned by the West Australian government and doesn't have anything to do with the Reserve Bank of Australia. I think you are confusing a state Mint with a federal reserve bank or a federal Mint (which is called the Royal Australian Mint).

    I also had a look at the latest annual report from their website and on page 38 there is a table at the bottom showing assets and liabilities pretty much matching. How does this line up with the leverage ratio?

  12. Robert says:

    Eric:

    Any comment on these GOLD ISSUES ?

    1: I don't see how buying allocated gold bullion - from BullionVault.com or anyone else - would protect you during a system-wide banking meltdown.

    They just use Swiss & UK bank vaults anyway - which can STILL be impounded by their governments during a crisis.

    Now if they owned THEIR OWN vaults - that would be a different matter.

    2: BullionVault just makes it easier to REMOTELY buy and sell during NORMAL times - like RBS and Deutsche Bank once did - but who now require on-site visits to purchase & store in THEIR deposit boxes.

    You're just saving on hotels & airfare to Europe simply to make a purchase.

    3: Likewise - bullion kept at home may be harder to sell - as it lived outside any recognized banker's vault system - risking buyers' scrutiny over possible tampering & product history.

    If you need to cash in a size-able amount - you could have problems.

    My concern here is that you'd have to wait for the crisis to pass, then quietly offload the stuff over time.

    4: The next option to my mind - is to fly to Dubai (I live nearby in Riyadh), and rent a bank deposit box & buy Kruggerands.

    This raises 2 issues:

    A: Dubai has no native gold coins of its own except one-off commemoratives - and I doubt UAE banks readily sell and buy Krugerrands.

    B: You'd be at the mercy of the "gold souks" which ARE monitored by the government. They DO sell kruggerands - but are NOT OBLIGATED to buy them back - they're in the business to SELL.

    During a financial crisis - its seems unlikely they'd be doing any big buying at the sky-high gold prices that usually attend financial crisis.

    Even if they did - you'd be at their mercy - since everyone would be looking to sell at that point - especially over a long & protracted banking system meltdown.

    5: So the only option left - that I can see - is to open an account at a South African bank - (they'd sell and buy their own Krugerrands) - and stuff some in a deposit box.

    Then hope the South African banking system survives the shakeout that would inevitably shutter more resilient US and European banks for months or years to come.

    I hate to be a party pooper - but I just can't see a good way to buy bullion - and I'd love to - believe me !

    Any Ideas ?

    Robert

  13. Bron says:

    My attention was draw to your article by a reader of my blog. I have left a response to your article on my blog but have also reproduced it below so your readers have another side to the analysis.

    My blog reader was interested in a comment by me on the 5.5% figure mentioned. The article is a bit of a rehash of a flawed analysis done by James Turk (competitor of the Mint with his GoldMoney) on our annual report.

    First statement is that in our 2002 annual report (wow, that is current) "$96.2 million of gold on hand against $234 million of liabilities". Now this statement assumes that the $96.2 and $234 are all gold. Well, unlike the analyst who wrote this, lets look to the notes to the accounts.

    Note 8 says clearly that of the $96.2, only $88.2 was precious metals, the rest being normal inventory items (eg like packaging). Not a major mistake but shows how much work was put into this analysis.

    But why is this analysis only looking at one item in the current assets but comparing it to the total current liabilities? If one looks at the other big current assets of $134.9 and then to note 7 one finds that $133.2 of it is a precious metal loan to a related entity AGR Matthey, which at that time the Mint had 50% ownership. This "receiable" represents physical metal used in AGR Matthey's operations. So it is a bit unfair to not include this in the precious metal assets backing the Depository client liabilities.

    The Mint on its website is very clear that unallocated metal is used/backed by metal in its operations and those of AGR Matthey.

    If we look at the liabilities, we see that it is composed of things like Provisions, which are clearly not gold denominated liabilities. Anyway, looking at the two major components of $111.8 and $110.6 and again to the notes it says that these are precious metal borrowings. But the $111.8 is interest bearing and the $110.6 does not attract interest. Now Depository has never paid interest on it unallocated liabilities, so we can conclude that the $110.6 must represent the unallocated "borrowed" from Depository clients. What is the $111.8? It is actual metal borrowed from bullion banks, and they aren't going to do so for nothing, hence that attracts interest charges.

    This means that in 2002, the Mint had $88.2 + $133.2 in precious metal assets against $110.6 in Depository client liabilities. No problem here, fully covered. The excess assets of $110.8 being funded by borrowings of $111.8 by bullion banks.

    Now this balance sheet and notes to the accounts type analysis is not obvious to non-precious metal people. We recognised that it was not clear so we added an additional note to the accounts to make it clear. Interestingly, this note was in the 2006 accounts that the article refers to and calculates as a 5.5% "coverage".

    Again, if they had bothered to look at the notes to the accounts, on page 78, note 23(d) they would have found a table that very clearly states:

    "The $886 million of precious metals deposited by Perth Mint Depository clients (note 16) was used in
    operations by Gold Corporation as inventory ($507 million - Note 7b) with the balance in the refining
    operations of AGR Matthey (Note 7a)."

    I should note that the amount under Note 7a is $590 million. Again, $886m backed by $507m at the Mint and $590 at AGR Matthey. I don't see where one gets 5.5% backing from, looks more like 123%.

  14. Bron says:

    I would also like to point out that the igolder analysis around gold confiscation is a direct plagarisation of my blog entry http://goldchat.blogspot.com/2008/11/australian-gold-confiscation.html without any attribution.

    I would also like to address Eric's statement that "When a bank/mint goes under, the same thing happens to the holders of these certificates: they become general creditors, with no lien/claim upon any portion of mint/bank’s assets."

    What is not mentioned is that as the Perth Mint is 100% owned by the Government of Western Australia and its obligations are explicity guaranteed by that Government, that is it technically not possible for the Perth Mint to become bankrupt. Holders of Perth Mint Certificates therefore ultimately have an exposure to the Government of Western Australia, which still has its AAA rating.

    It is this combination of the Perth Mint backing its unallocated liabilities 1:1, having them fully insured and then guaranteed by the Government that has resulted in many investors (50% of which are American) feeling that it a safe option for storage of gold.

  15. Anonymous says:

    I have been buying pert mint gold coins online and having them shipped to my home. Do you see any problems with owing the actual gold?

  16. Bron says:

    The only problem with owning actual gold is risk of theft, but as gold is very compact relative to its weight/volume, you should be able to hide/secure it (unless you're talking millions of dolllars).

    I would always recommend holding some physical in addition to storage in reputable facilities.

  17. was says:

    I've been trying to contact the number provided by the Perth mint for about 10 days. Sean Paul McGoldrick
    Tel: +61 (02) 9362 4984. I've also written to them twice - no reply.

    Why is there just one named person advertised on the website? why are they inaccessable? Looks like a crock of S... to me.

  18. Bron says:

    was, direct contact details for Perth Mint Depository are in the client pack at http://www.perthmint.com.au/investment_depository_how_to_open_account.aspx

    In regards to Certificates, our direct contact details are at the bottom of http://www.perthmint.com.au/investment_certificate_approved_dealers.aspx

  19. Anonymous says:

    your phone number above with (02) needs to be (08) as perth mint is in WA and (02) is 3000 miles away in NSW.

  20. goldcoins says:

    Thanks for the great reading, we are gold Market Analyst bullion in a

    recession. I will pass this on to our ira clients to read

  21. rklemaster says:

    Since the Perth Mint is an actual mint, if they don't have 100% of the gold in stock when you want your gold, can't they just make more? Allocated gold through the Perth Mint seems like a pretty safe bet to me.

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