Do you feel there’s something ominous about the global economy and the markets?
Yes, the market indices are still trying to grind up like Sisyphus pushing a boulder up a hill, except it seems to roll back down soon after.
Just as you think global inflation is contained; the US Federal Reserve Chair Jerome Powell comes out to say that the Federal Funds Rate needs to be higher to bring inflation under control.
Really, still? The inflation they didn’t see hurtling at us in mid-2021 like an asteroid on a collision course with Earth remains a persistent problem?
So, we should expect leaner times to remain for longer, meaning it’s a good idea to prepare to secure your wealth if you haven’t already.
As a gold enthusiast and a shameless promoter of gold, I’m slightly annoyed that it’s taken a bit of a smacking earlier this week. Though you probably expect I’d be accustomed to it in the last two years.
But there’s another irritant that landed in this saga of gold price stagnation. And this one is more to do with the reaction to the event than the event itself.
Let’s get into it…
On Monday night, I saw a bombshell article from the ABC on a major scandal involving the Perth Mint and how it sold gold of lower purity than stated to China. They were caught and then tried covering it up.
In short, the Perth Mint was seeking to save on costs by diluting the purity of their 99.99% gold bars since 2018, which was estimated to save around $620,000 on the cost of sales annually. In the grand scheme of things, the Mint sold $20.3 billion worth of gold last year and annual sales revenues would be of a similar amount in the recent past.
How did they get caught?
The Shanghai Gold Exchange purchased a large volume of gold from Australia via the Perth Mint and tested it for purity according to their standards, which imposed limits on how much silver and copper are permissible in the gold. However, it found that 100 tonnes of gold from the Perth Mint didn’t meet its purity standards.
The problem came from a coverup, in that when the Shanghai Gold Exchange notified the Perth Mint, the Perth Mint responded by testing batches of its gold bars and found problems in several batches. This was because the Perth Mint allegedly began adulterating its gold bars as part of its cost-saving measures. It failed to notify the Shanghai Gold Exchange of this. Instead, the Perth Mint sought to place the burden of proof on the Shanghai Gold Exchange.
I’m sure as time passes, this web of intrigue will get deeper.
Serious reputational damage to Perth Mint, but not for gold…don’t confuse the two!
I won’t be surprised if there’ll be plenty of hit pieces coming out in the press regarding this scandal, and many gold naysayers could pump this up.
I don’t discount this as a serious scandal, as it is a breach of trust by the Perth Mint. It puts doubt into all buyers of products from the Perth Mint hereafter. There’s no denying that.
But I want to put things into perspective. Let’s look at those numbers again.
So the Perth Mint sells around $20 billion of gold annually. It ‘doped’ its gold to save $620,000 on costs each year.
If you get my drift, something doesn’t seem to add up. But let’s run with these numbers.
Firstly, the purity standards for gold and precious metals products are very stringent. It’s not simply set by a gold bullion fabricator itself, but it’s based on international standards. Therefore, the Shanghai Gold Exchange’s complaint about the purity falling short should be taken as is rather than them downplaying the matter.
This leads me to the second point. If the Perth Mint is only saving that small an amount when skimping on the quality of its gold, then it goes to show the gold products aren’t really that badly diluted. After all, $620,000 a year of savings against $20 billion should hardly raise an eyebrow.
Thirdly, the Perth Mint is likely to have adulterated the gold for industry-size products rather than the smaller denomination bars and coins.
This is my opinion, so don’t run with my views.
Following from these three points, I wouldn’t lose sleep over the Perth Mint gold products that I own. We’re not talking about the previous scandal in China where gold-plated tungsten bars were sold.
In saying that, I would conclude that you should be wary about the gold you purchase. But this scandal shouldn’t deter you from continuing to buy precious metals as a means to protect your purchasing power.
I also want to add one more thing. If you own any South African Krugerrand coins, you’ll realise that they sell for a cut higher than the equivalent products from the Perth Mint, Royal Australian Mint, and the Canadian Mint. This is because the composition of a Krugerrand is around 91.67% gold, and the rest is made up of copper. It’s a more durable coin as a result of the copper. However, owing to its composition of having less than 99.6% gold or 99.5% silver, it attracts a GST.
What am I getting at?
I believe that the Perth Mint’s doping scandal may have meant that it sold gold at less than 99.99% purity, but it’s unlikely to have gone below 99.6%, when you do the maths.
So, in my view, the scandal is more on the trust and reputation of the Perth Mint brand, not on your gold or the investment case for gold. I hope this clears up any confusion that might come up, should the media bombard the public with a likely tidal wave of anti-gold hit pieces.
A lucky coincidence or something more…?
But that’s not all.
Before the anti-gold hit pieces make their rounds, gold took a hammering in US trading on Tuesday after the speech by Jerome Powell explaining we need to raise rates higher to combat inflation. It fell US$35 an ounce and brought it close to the US$1,800 mark again.
I’m sure that the gold price moved this way because a higher interest rate will see the US long-term real yield rise, putting pressure on gold.
But I just have this uncomfortable feeling about the timing of this speech and the article about the Perth Mint adulterating its gold.
Naturally, some people will read the ABC article and swear off gold, thinking all gold bars and coins are scams. That’ll play into the hands of central banks who’ve been buying gold last year, and likely into this year, as they know the global economy is in the toilet.
It’s not like you can put it past them to buy gold cheap, if possible, even talking it down so they can create this opportunity. I mean, they did tell us they couldn’t see inflation from miles away despite doing everything to cause it and then having government agencies play with the data to create the illusion that it’s not there!
Either way, whether this was a coincidence or planned, I’d say don’t let the Perth Mint scandal scare you off gold.
If you can buy it cheaper, all the better. That’s what the central banks will do.
And this is one of few things where I believe you can follow in their footsteps…
Editor, The Daily Reckoning Australia