FYI | Feb 05 2007
By Greg Peel
There has been alarm generated among some FNArena readers as a result of an article published at Silverseek.com, a popular US-based newsletter/blog. Silverseek’s Ted Butler is a prolific writer of articles related to the precious metals industry and holds the strong opinion that prices should realistically be a lot higher than they are. FNArena outlined some of Butler’s research in “The Age Of Silver” (Sell&Buyology, 24/11/06).
In a recent article, “Buyer Beware”, Butler questions the value of investment in precious metals via the holding of pooled certificates. Pooled certificates offer the investor an amount of metal that is subsequently stored on his or her behalf. Butler questions whether such certificates are indeed of any value at all. He says:
“Lately, I have been thinking once again about investment pool accounts and certificate programs for unallocated silver (and other precious metals). Although I have written about such accounts frequently in the past, I still get questions from readers. So let me be clear. My new thoughts lead me to believe that at some point it must end in disaster for both the buyers and issuers of these programs. I will try to explain why and convince you to the best of my ability to get out of these programs now.
“What is a silver pool account or a certificate program for unallocated silver? In simple terms, these are purely paper promises or bookkeeping-only entries that are sold as an alternative for owning the specifically earmarked real silver of segregated or unallocated type accounts. For illustrative purposes, an example of a pool type account would be kitco.com www.kitco.com and for unallocated certificates the Perth Mint of Australia www.perthmint.com.au but they are not the only examples. Most people who buy this paper form of silver are not aware that there is no specific silver backing up these accounts, only a promise of some type by the issuer. If a problem develops either in the silver market (a shortage) or with the issuer (insolvency) the buyer could end up high and dry. The buyer pays full cash value for the silver, yet may not get the silver or the value of the silver.”
FNArena is unable to speak for Kitco.com and is unaware of a response to Butler’s article from the bullion dealer. However, FNArena has always directed readers to the Perth Mint for a most comprehensive range of precious metal investment products.
FNArena has no hesitation in continuing to do so. Unfortunately in this instance, Butler’s article shows a chronic lack of research.
FNArena has been in contact with the Perth Mint, offering an opportunity to set the record straight. The Mint had already been approached by investment consultant and precious metal manager, Euro Pacific Capital, an approved dealer of Perth Mint products. The Mint’s response is as follows:
“As a manufacturer of precious metal products and a refiner of precious metals, the Perth Mint needs a sizeable quantity of physical gold and silver to support its operations. When a client purchases metal from the Perth Mint, the Mint immediately purchases a like amount from the open market. This metal is normally purchased in London and then either the physical metal is shipped to Perth or swapped for physical in Perth. The physical metal held in Perth is used as work-in-progress inventory, finished coin and bar inventory and serialized London Good Delivery Bars. As this metal would otherwise have been leased in from counterparties at commercial lease rates, the use of depositors’ metal to support inventory represents a cost-saving to the Perth Mint, hence its ability to offer the zero storage charge.
“The Perth Mint holds full inventory confirmations on a quarterly basis and is subject to comprehensive and rigorous 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.”
Danielle Dwyer-Psarras of Euro Pacific Capital qualified the Mint’s response in a published article:
“Over the years, the terms ‘unallocated metal’, ‘pool accounts’ and ‘certificate programs’ have attracted some controversy. I often receive questions from our clients and readers regarding the Perth Mint Certificate Program (PMCP) and whether the related risks of traditional certificate programs apply. I am here to set the record straight. The answer to this question is: The Perth Mint Certificate Program is an exception to the rule.
“As an approved dealer of the PMCP I mainly want to address why the Perth Mint is able to offer free unallocated storage, which was recently disputed in an article written by Mr. Ted Butler. I have asked for a formal response from the Mint to help defend our position on why we here at Euro Pacific Capital feel that the PMCP is the very “Best Way to Buy Precious Metals”.
“The Perth Mint’s investment policies as described above are clearly described on its website at www.perthmint.com.au/gc/depository/depository_layout.asp?url=5.
An added benefit to the Perth Mint Certificate Program is that your metal is fully backed and guaranteed by the Government of Western Australia which is further insured by Lloyds of London. Not only is the State of Western Australia Australia’s wealthiest State, but they are AAA-rated by the US international credit rating agency, Standard & Poor’s.
“In addition, Americans also face the potential risk of government confiscation. Having some gold safely stored in Australia may be one way to guard against such actions. A significant number of PMCP clients are United States based, who look for a politically and economically stable offshore location for their precious metals given that the United States did confiscate gold in the 1930s. It is important to note that the Perth Mint is a State Government body and therefore is not controlled by Australia’s Federal Government or the Reserve Bank of Australia. Confiscation is the preserve of Federal Governments. Finally, if things really get bad here it’s comforting to know that you can flee with nothing on you, but still have tangible assets waiting for you in Australia.
“All in all it is agreed that there are general concerns about pool and unallocated accounts where it cannot be established if the operator is backing its liabilities to investors. Therefore, it is extremely prudent for investors to research and question any program or facility they are investing or planning to invest in.”
This article now appears on the Silverseek website. It is true that in the past (and this is a fact readily acknowledged by the Perth Mint) there have existed certificate schemes for precious metals that are of questionable guarantee. That is certainly not the case in this instance.
FNArena continues to recommend that readers looking to safely invest in gold or silver visit the Perth Mint website for a range of products.