Mar 222016

After two decades with The Perth Mint, Bron Suchecki has left to take up a new career challenge. We wish him well in his new venture and thank him for his outstanding contribution to our business during his time in Perth.

We’ve decided that this is a great opportunity for the Research Blog to take a time out.  We’ll use this time to review its place in our overall suite of content sites, and ensure that The Perth Mint continues to offer insightful content in the right format to our readers and followers.  While we do this, we will ensure that the valuable content and reference material currently available on the Research Blog remains available to you.

And we look forward to sharing with you some new initiatives to ensure The Perth Mint stays at the top of your list of sites to visit for knowledge and thought-leadership in precious metals.

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Jul 132015

So Texas wants to build a bullion depository. Welcome to the club – The Perth Mint, wholly owned by the state of Western Australia, has been offering storage services to locals and overseas investors since the 1980s. Is it a smart idea or a fiscal folly pandering to doomers and preppers, as some in the mainstream media imply?

While being used to mainstream media derision about gold, I was surprised at the way the media made fun about Texas’ move, some examples:

  • Bloomberg: Texas wants its gold back from the Yankees, wherever they’re keeping it.
  • LA Times: Whether you call them visionaries or call them chuckleheads
  • Talking Points Memo: And in case the Fed or Obama wants to confiscate Texas’s gold, nice try Fed and Obama!

So much for journalistic objectivity but it certainly doesn’t help if Governor Greg Abbott can’t get the location or value of the University of Texas Investment Management Co’s (UTIMCO) gold right. While the media were happy to make fun of goldbugs, operating a depository is not a “perhaps generating revenue for the state” business.

For example, over the past 10 years The Perth Mint has generated $212,661 million in profit before tax and paid $164,299 million to its state government. Yes we do operate a refinery and mint in addition to a depository facility, but these figures show that a precious metals business can be profitable.

The key to profitability is scale, as margins in all aspects of the business are very low (the average profit margin before tax for The Perth Mint over those 10 years is 0.7%). In the case of a standalone depository, scale is even more important as it involves a large fixed cost (the building) compared to ongoing operating expenses (whether you hold $1 billion or $100 billion, the staff to watch it are pretty much the same).

Texas’ Legislative Budget Board Fiscal Note estimated first year costs of $10 million and ongoing costs of $4.5 million. While one could build a sizable depository for $10m, the estimate of 71 staff (which I guess is behind most of the $4.5m) is way out, even if it did include an electronic gold payment system.

If we assume a capital cost of $10m with a low depreciation of 20 years, then that is $500,000 a year. With UTIMCO reportedly paying less than $1m a year on its $500m worth of physical gold, the Texas depository is already looking good. Conservatively I would think they could get another $500m of institutional business and in terms of retail, considering that The Perth Mint stores $2.7 billion, Bullion Vault $1.5 billion and Gold Money $1.2 billion, a target of $1 billion in retail deposits is achievable, particularly since Giovanni Capriglione said that “when I first announced this, I got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository.”

Together that totals $2b, which at a 0.2% storage rate is $4m. Less $0.5m depreciation, insurance and operating costs that is a profitable business. You may not think those numbers sound like much, and that is true, but think about the 700 tonnes of gold stored for the GLD ETF. At 0.1% storage fee that works out to around $27m. In a depository business once you start talking volume almost every dollar of additional storage fee revenue is pure profit.

While we are on fees, just let me indulge in a side rant at the LA Times who thinks that “bullion is expensive to store because it requires rock-solid security” – a 0.1% to 0.2% storage fee is less than many management fees on mutual funds. And no, gold does not need “to be regularly assayed to establish its purity, especially if it’s moved, unless under painstaking chain-of-custody conditions” – professional custody process are simple and involve no “pain” for investors.

Back on topic, I note the inclusion of anti-confiscation wording in the bill, which demonstrates the Government’s support and backing of the depository and this is similar to how the West Australian Government included a Government Guarantee covering The Perth Mint’s operations into its legislation. I think this is an important and necessary inclusion to build trust in the facility.

You may be surprised at why I’m OK with another competitor, but I think Texas’ move will grow the market rather than be a case of just splitting up the same gold pie into smaller slices. I also get where Texas is coming from – culturally Texas and West Australia are similar, particularly in how they relate (or not) to their federal government. For example, in 1933 68% of West Australians voted to secede from our Federation. Texas has a good chance of success with its new depository and I think it will be good for gold and the gold industry.

Jun 102015

Today we complete our 12 reasons not to own gold, which also draws to a close this little pros and cons exercise.  Read on for further issues to consider in advance of any gold and precious metals purchases.

7. Supply/Substitution

Nearly all the gold ever mined is still in existence today – this has been part of its attraction (durability) as a form of money throughout history – and it also makes it somewhat unique.  Although there are some industrial uses for gold it is, as a result of its value, normally economic to recycle this (it’s typically not consumed in said industrial processes) and this therefore means it continues to remain in the total pool of available metal. In the global gold marketplace, there is no real distinction between ‘new’ (first supply after mining and refining) and ‘old’ (recycled) gold, and these differing sources compete directly for the same pool of demand. The issue this presents is, if gold demand drops substantially enough, the market can become significantly oversupplied as a result of the level of secondary metal available. This can even lead to net purchasers becoming net sellers, thereby both reducing demand and increasing supply. Compare this to oil, wheat etc. that are consumed when used and therefore, assuming no substitution becomes available, there will always be a demand for more.  In essence, the demand for gold has in the past and could again go ‘negative’ with secondary supply exceeding demand.

8. Size of Market

Although the gold market is a reasonable size and relatively liquid, it pales in comparison to the size and liquidity of the equities, bonds or derivatives markets.  Arguably this could actually be considered a positive as well as a negative, however it is clear that a smaller market is more prone to large movements in price, and hence increased volatility.  Furthermore, the ‘other’ precious metal markets are actually significantly smaller in size than gold and can experience liquidity issues – one only needs to view the spread on platinum and palladium spot prices to see the issue this presents.  There have even been historical precedents of precious metals markets being ‘cornered’.

9. Popularity Shift

If you look at the developed Western part of the world, there is mostly a level of ambivalence towards precious metals for anything other than ornamentation and jewellery – there are notable exceptions such as Germany, but even there the general populace’s view of gold is still primarily as a means of decoration. In one of the prior blogs we identified the rise and increasing per capita wealth of China and India, with their cultural affinity for gold, as potentially being very positive for gold prices mid to long term.  This could also easily be expanded to include most of Asia and the Middle East – pretty much as soon as you head south and east of the Mediterranean, gold appreciation begins to rise.  However, what if increasing prosperity at an individual level (the main reason given for support of demand and subsequently prices) actually changed the perception and therefore demand of gold and precious metals within the populace of these various places?  What if the ‘Love Trade’ was somewhat weakened?  It is certainly a potential eventuality worth considering.

10. Government Confiscation

As the old saying goes ‘History may not repeat itself but it does rhyme’.  Although the idea of government confiscation may to some appear outlandish, we must at least acknowledge that this has happened in the past, with the US Executive Order 6102 potentially being the most notable example. Perhaps in this case “confiscate” is too harsh a term as private holders of gold did actually get recompensed for the gold they handed in. Crucially, however, compensation was paid at USD20.67 per oz and then the gold was immediately revalued to USD35.00 per oz – i.e. private holders were, to put it inelegantly, royally stiffed.  Many jurisdictions actually have statutes on the books which can be leveraged to confiscate private gold holdings, usually in cases of emergency.  Clearly what constitutes an emergency would be at the discretion of the authorities enforcing said statutes…

11. Rise of the challengers

The digital age has not only provided us with the convenience of mobile banking (and the inconvenience of social media…), it has also spawned various crypto currencies, the most well-known of which is Bitcoin.  Although it is my humble opinion that these crypto currencies exhibit many of the potential negatives of holding gold (volatility, no yield, popularity shift etc.) and little of the positives, there is no question that we live in a digital age and following generations may have more of an affinity with a digital rather than historical form of money. Crypto currencies do have some advantages including anonymity, direct merchant acceptance and ease of international transacting, which physical gold doesn’t necessarily share.  Is it a direct competitor?  I’d say not. But as an additional alternative to fiat currency, it may attract some of the money flows which would otherwise go to gold and precious metals.

12. Barbarous Relic

Many a gold bug scoffs at this statement; however it has been uttered by some influential thinkers and investors – John Maynard Keynes and Warren Buffet to name two. Whether we agree with them or not, these two people have had a profound impact on the current thinking around both monetary policy (Keynesian economic policy is pretty much the playbook all developed economies have in the back pocket) and investment psychology.  When the Oracle of Omaha speaks, people listen.  And when central bankers speak, a (albeit slightly twisted) version of Keynes can be heard.  Arguably these two people alone may have had quite an impact (likely not positive) on people’s attitude to, and appreciation for, gold and other precious metals. Has this already been priced in though?


We’ve now completed both the pros and cons of owning gold (and precious metals in general) which we hope you’ve found useful. Upon reflection it’s apparent that the cons identified really indicate that you shouldn’t put all of your wealth into gold (or precious metals in general) however the pros emphasise the value of having a portion of your portfolio devoted to these hard assets.

The way I personally view ownership of gold is as a pure savings and wealth preservation vehicle, with a little insurance thrown in, as opposed to as an ‘investment’ (investment in this case being an allocation of capital which is put at risk in the attempt to significantly grow overall wealth).

So in summation, the path isn’t completely golden (yes, bad pun intended – I formally apologise) when owning precious metals, and it is important that any prospective purchaser understands that…however the merits of allocating at least a portion of your portfolio in the direction of precious metals are certainly there.

Jun 092015

OK readers, we’ve had the uppers, now it’s time for the downers.  Ownership of any ‘asset class’ is never a one way street – there are clear advantages and disadvantages and it pays to consider both.  Only seeking out confirmation bias with your investment decision making is potentially a one way trip to the poor house.  Read on for some of the issues you should consider before taking that plunge into gold and other precious metals ownership. Please note, as with the prior ’12 reasons’, these are in no particular order of importance.

1. No Yield

Gold (and other precious metals) typically doesn’t offer a yield.  Although some central banks and the larger bullion banks may have the opportunity to lease out their respective metal holdings, this is not an avenue available to the majority of precious metals owners. As identified in prior blogs, the low interest environment we are currently in does somewhat mitigate the opportunity cost of forgone yields, however it is important to acknowledge that there are still competing investments available that offer reasonably enticing yields (whether these are enough to offset the risk to capital is clearly debatable). Clearly this must be appropriately weighed up by anyone considering purchasing gold.

2. Ownership Costs

Depending on how and where you hold your gold, not only may you not receive yield, you may actually need to pay storage (or other related admin fees) on your account and/or holdings.  Any reputable custodian of your metal should have secure storage facilities (underground vaults etc.) and complete insurance coverage – none of these facilities are likely to come free.  There are certainly some cheaper alternatives, for instance our own unallocated product has no storage or other such annual fees. If pursuing any of these potentially more economical alternatives, individual owners will need to satisfy themselves around counterparty risk as often many of them will not have specifically allocated metal held in your name.

3. Historical Returns

Looking historically, and given enough of a timeframe, total returns on stocks have always outperformed gold.  For the last 100 years, the return on gold has annualised at 4.2% whereas the total return on stocks (with reinvested dividends) has been roughly 10% annually.  You can see this is quite a difference and given the magic of compounding, it provides a very substantial difference to long term returns.

To illustrate, 1 oz of gold was roughly USD19.25 in 1915 and in 2015 has hovered around USD1,180.00, good for a little over 6000% in gains. Not bad, but at the same time USD19.25 invested in shares in 1915 would now be worth upwards of USD265,277.00 – and this is roughly 250 times the return received on gold.  Interestingly, if you shorten the time horizon to when President Nixon severed the last link to gold (1971) which removed direct price fixing of the yellow metal (although debatably not price manipulation – but that’s a whole other topic), the returns become far more similar although they still favour shares. In short, gold is a great way of staying, but not necessarily of getting, wealthy over the medium to long term.

4. Medium of Exchange

Although historically precious metals, specifically gold and silver, have regularly been used as a direct medium of exchange for goods and services in one form or another, this is certainly not the case in the contemporary environment.  In essence this means you can’t walk into your local grocery store and pay with a minted precious metal coin, certainly not if you want to receive fair value (many minted coins have a legal tender value far below the intrinsic metal value…but would it be sensible to use at face value?).  The moral – definitely don’t hold all your wealth in the form of precious metals, you still need to be able to easily access circulating currency in most modern urban environments.

5. Price Volatility (when measured in fiat currency)

Somewhat related to the above, the price for gold can fluctuate quite dramatically when measured in fiat (paper) currency, be it the USD, Euro, GBP or even the little old Aussie battler, AUD.  As most people’s revenues and costs (to use accounting speak) are usually received and paid in fiat currency, and often only one at that, the movement in value of gold holdings in this respective currency may be a little disconcerting.  As the gold market is largely USD based (although you can buy and sell in pretty much all internationally traded currencies), this volatility is typically, though not always, heightened for those whose main currency of exchange isn’t USD.  The advent of ETFs, derivatives and various other financialisation tools appear to have led to an increase of speculative inflows into gold (and other precious metals) which also seem to amplify this price volatility.

6. Commodities Link

There is little doubt that gold is largely an ‘investment’ metal with a low relative percentage of industrial use, however it is still more often than not considered a commodity by the majority of the participants in the modern global market, and this means it is vulnerable to movements within the commodities market in general.  This is likely exacerbated by all three of the ‘blanco plateado’ precious metals (silver, platinum and palladium) having strong industrial uses and therefore more commodity like characteristics – guilt by association one might say…  Although this has been identified as a con in our little pros and cons exercise, it could also be considered a pro, particularly when commodities markets are strong.  Given our emphasis on Gold and precious metals acting as an anchor in somewhat turbulent global financial markets, we’ve decided that a commodities association is more of a negative than a positive (albeit a very minor one).


So there you have it – our first 6 considerations which should give you pause for thought before rushing head long into sinking all of your available funds into gold, or other precious metals.  We’ll pick up where we left off tomorrow and fire off another 6 points to carefully consider before progressing your gold or precious metals purchase.

May 142015

Last week Koos Jansen “came out” (as in his identity, not sexual identity) by publishing an interview he did with a Netherlands newspaper on 9 April under his real name of Jan Nieuwenhuijs. Is writing under a pseudonym shirking from taking responsibility for your work, or just a safety measure to protect yourself from nutters?

Probably the most famous anonymous writer(s) is Zero Hedge, who explained their position in 2009 by arguing that not using their real names “turns the conversation to the content, and away from the author, the author’s biography” and should only be a problem “where the reader is unwilling or unable to distinguish facts presented by the writer from opinions expressed by the writer”. Admirable sentiments, although some may argue that Zero Hedge has changed quite significantly since 2009, with content now being subordinated to clicks.

The counter argument is that without any real reputation at stake, a writer may be more careless with the truth – not a problem in the gold blogosphere, however (I think a “LOL” is appropriate here).

I asked Jan/Koos why he initially decided to operate under an alias (FYI “Koos” is a normal name in the Netherlands, like say a “Bruce”). He said that he felt it would mean he would be more free to say whatever he wanted to say and it would keep that completely separate from being a sound engineer. This was also a factor for Australian blogger Bullion Baron, who said that while he stands behind what he writes, “some of my views aren’t popular and I prefer to minimise the risk they come back to bite me (e.g. potential employer finding out of context comments using Google)”.

Warren James, who writes at the Screwtapefiles group blog using his real name, sees it differently and he considers using his real name as a positive for current and future employment as he gets credit for his work (specifically the Bullion Bars Database). He said it also makes him more accountable and forces him to double check his work.

In my case, when I started my personal blog in 2008 I thought it was “important to disclose any potential “agendas” or commercial interests because while in theory one should be able to assess the validity of an argument independent of the writer, full disclosure helps the reader to be vigilant”. I also thought in practice that it would constrain my writing to have to constantly think whether something in my writing would “give me away”.

While being anonymous gives you more freedom to speak your mind, it doesn’t save you from being attacked personally by trolls and nutters, which is a general problem on the internet. In the case of precious metals, for those advocating self storage anonymity is probably essential lest someone try and find out where you live.

When Jan Nieuwenhuijs started his In Gold We Trust blog in 2013 he said he didn’t know it would gain the popularity it did, or that he would be able to make a living out of it (Jan quit sound engineering work at the end of 2014 when he started writing for Bullion Star professionally). Often the choice of a pseudonym is made without consideration of the future. As an example, consider the case of Craig Hemke, who runs the TF Metals Report. No doubt he considered his choice of “Turd Ferguson” as nothing more than a funny alias to use for commenting on Zero Hedge, without any expectation that it would lead to his own paid website. While in Craig has noted “how few interviews I do? It’s because so few want to have someone named Turd as their guest”, he still posts under the Turd alias as its “brand” recognition is just too strong.

Jan feels that same branding problem, as all his work to-date is under the Koos name. He’d rather use his real name, but how to transition? My suggestion: dual brand for a while, like Nissan did when it phased out the Datsun brand – write as Jan “Koos” Nieuwenhuijs for six months and then just drop the “Koos”.

May 012015

Earlier this year Societe Generale mapped asset classes in a matrix according to popularity and profitability over the past few years. It got me thinking about applying the same idea to gold to show how its sentiment had changed over the past 10 years.

Working out the profitability dimension is easy – we can use the percentage change in the gold price. Popularity is a bit harder as there aren’t any investor sentiment surveys. To approximate sentiment, I have used changes in ounces held by the major gold ETFs, funds and other services like Perth Mint Depository. The result is the chart below.

Gold Price vs Sentiment Map

Gold Price vs Sentiment Map

For each month over the past 10 years the map plots a point for the percentage return on gold (over the prior 6 months) and the percentage change in ounces held (over the prior 6 months). The monthly plot points are then joined into a line for each year. I placed an arrow on December of each year to give an indication of the direction of movement over time.

For this sort of scatter type chart we would expect to see a direct relationship between price and popularity – as the price goes up, more investors would buy gold. In general we do see that most of the points are scattered diagonally from the Loss/Loathed (“Sad”) quadrant to the Profit/Liked (“Happy”) quadrant.

Particularly interesting is 2008 where the line strays into the “Crazy” quadrant where people like an investment that is losing money. As the gold price declined during 2008, the purple line moves towards the left (Loss) but instead of going down to Loathed, investor flows into gold actually increased. The explanation for this behaviour is that investors were fearful and looking to protect wealth. This subsequently turned out to be far from crazy as the gold price increased significantly from 2009 to 2011.

The 2010-2012 period (light blue and green lines) are also interesting in that while gold was still showing positive returns, interest/growth in ounce held never got above the 10% level. This weakening in the sentiment then led into Loathing, where we have been mired since.

So far the 2015 red line looks encouraging, with any luck gold will move out of the Sad quadrant and into the Happy corner (it is not coincidental that I put The Perth Mint’s swan logo in the top right corner, that is certainly a happy point for us as well as our customers).

Note on calculations (for nerds).

Using month on month percentage changes produced a lot of noise in the plots – I found a rolling 6 month change was ideal for showing the general direction of the trend.

For the gold price I used a rolling 5 month period average on USD gold prices as recorded by The Perth Mint, to smooth out the data and produce less noise in the plot.

For sentiment I used a rolling 5 month period average of the following ETFs/Funds/Services, as these were the only ones in existence 10 years ago (didn’t want to skew the ounce data with new funds starting up mid 10 year period, as they usually have an initial surge) and they also had to allow outflows and inflows (hence closed-end funds like Central Fund of Canada was excluded), in order of size: GLD, IAU, ETF Securities (LSE & ASX), Perth Mint Depository, Bullion Vault, Permanent Portfolio Fund, ABSA NewGold, Gold Money, Bullion Management Group, Goldist. Thanks to Nick at for the ounce data.