Allocated & Unallocated Storage

What is the difference between allocated and unallocated storage?

The key difference is one of segregation of the physical metal behind the deposit.

Allocated

Allocated storage is the traditional way of holding precious metals.  Clients purchase specific physical coins or bars from the Mint.  The Mint removes these from its operating inventory and places them in the Perth Mint Depository vault under the client's account number (to preserve client's privacy from vault staff).

Allocated precious metal is therefore segregated from the Mint's operating inventory and is held under a custody arrangement.  Allocated metal does not appear on The Perth Mint's balance sheet.

At purchase, clients pay for the precious metal in the bar or coin, the relevant fabrication charges, and one year's storage fees.

Unallocated

With unallocated storage, also known as a metal account, clients purchase an interest in a pool of precious metal held by The Perth Mint.  The Mint purchases an ounce of precious metal from the spot market for every unallocated ounce it sells to clients.  Accordingly every unallocated ounce is 100% backed.

The precious metal purchased by the Mint is recorded on its balance sheet as an asset and the unallocated amounts sold to clients are recorded as a liability.

At purchase, clients only pay for the precious metal.  There are no fabrication charges or storage fees, until clients elect to convert their unallocated into a specific coin or bar, which they can do at any time.

How can unallocated be 100% backed, yet there is no storage fee?

Unlike other depositories, which are merely warehouses, The Perth Mint is a manufacturer of precious metal products and through its interest in AGR Matthey, one of the world's largest refiners.  Accordingly, the Mint has a substantial requirement for physical metal to support these operations.

To fund this work-in-progress inventory, the Mint traditionally borrowed metal from bullion banks, at cost.  At the same time, there were investors storing metal with bullion banks and others, at cost.

The Mint realised that if it took deposits directly from investors, it could cut out the intermediary and create a win-win situation: the Mint wins by obtaining free funding for its inventory and investors win by getting free 100% backed storage.

In order for The Perth Mint to utilise a client's unallocated metal, the PMDS and PMCP client agreements are structured so that a client permits The Perth Mint to use the client's unallocated metal "for its own account as if it were the owner".  As this usage provides a small commercial benefit to the Mint, it is able to offer a fee-free storage and provide simpler transaction procedures that many clients find attractive.

"As if it were the owner" is very wide, what is the Mint's policy on use of unallocated metal?

The Western Australian Government imposes strict guidelines on The Perth Mint's management.  The Perth Mint is not a bullion bank and does not provide project financing or bullion lending/derivative services to mining companies or other entities.  It does not lend client's unallocated metal to support short selling transactions or other derivative activities.  The unallocated metal is utilised solely to fund the Mint's operations.

The Perth Mint's business mission is to provide investors with one of the world's safest locations for precious metal storage, especially in an environment of increasing global financial and corporate risk.  Use of unallocated metal outside of The Perth Mint's operations is not consistent with this mission.  It would introduce an unacceptable level of risk and compromise the Mint's growing international reputation as a safe haven depository.

Does usage of the metal by the Mint affect my ability to collect physical metal?

Any use by the Mint of unallocated metal does not affect a client's right at any time to sell or request delivery of metal in a physical form.  The Mint has a legal obligation to ensure client precious metal is available for collection within a specified period from the date of receiving a client's instructions.

The Perth Mint maintains finished goods inventory of its coins and bars at all times to meet normal demand from its distributors and Depository clients.  Accordingly, unallocated clients will usually be able to convert their metal within a few days of giving notice.

However, it is important to note that if you request a physical product that is not in stock, or a very large quantity, the Mint may need to manufacture it.  The lead times for manufacture will depend upon the size of the order, current demand and production capacity.  It is because of this uncertainty that some clients choose allocated storage - as their metal has already been fabricated it is ready for collection at short notice.

Clients worried about potential delays in collecting metal in extreme circumstances, but with concerns about the cost of allocated storage, usually take a staged approach:

1.       While the world environment is benign, they hold unallocated.  They do not incur ongoing storage costs and fabrication charges. 

2.       When the environment becomes uncertain and risky, they convert to allocated. 

3.       When the world is at a crisis point, they take delivery of their physical metal. 

This approach can save clients significant amounts of money as it may be some time between stage 1 and 2.  Clients who do not feel they can judge the shift from stage 1 to 2, or feel it may be sudden and unpredictable, opt for allocated as they are using precious metals as "insurance" and see the storage fees as the cost of that insurance.

If unallocated is on the balance sheet, doesn't that mean I am exposed if the Mint becomes insolvent?

Correct.  However, as The Perth Mint is wholly owned by the Government of Western Australia and operates under an explicit Government Guarantee, your exposure is actually to the Government's solvency.  Perth Mint Depository clients ultimately accept a sovereign risk exposure to the State of Western Australia.

The Government Guarantee section of this website provides further information on the relationship between the Mint and the Government and the strength of the Government's balance sheet.  Given that Governments have the power to tax, most investors view the possibility of a Government becoming insolvent as highly unlikely.