Perth mint accused of selling counterfeit gold bars

On March 6, 2023, The Perth Mint was accused by the Australian Broadcasting Corporation (ABC) of selling counterfeit gold bars to its largest customer, Shanghai Gold Exchange (SGE). An accusation of this magnitude should be considered a bombshell in the world of precious metals, as it could affect the good name and business relationships of one of the world's best-known mints.

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T he Perth Mint denies accusations coming from ABC News. The Australian mint was also backed by the Shanghai Gold Exchange, an alleged victim of counterfeiting. In addition, the London Bullion Market Association (LBMA) has announced an audit of gold bars produced in Australia - which sounds scary, but is just a precaution and standard procedure.

From this come discussions on finance and considerations of a potential appreciation of the price of gold or a shift in geographic focus between commodity markets.

Due to the size of the issue addressed, we decided to divide it into several separate parts that make up a common whole. In doing so, the editors would like to point out that the distribution of gold information per se may therefore be uneven.

Smear campaign? A serious matter? Or maybe just making a fork out of a needle?

ABC accuses The Perth Mint of alleged doping

We have to start with the source material, on March 6, 2023, reporters from the Australian public broadcaster made the allegations in a program called "Four Corners." This is a television program described as dedicated to "exposing scandals, sparking investigations, igniting debate and confronting taboos." ABC News published an article titled "Perth Mint sold diluted gold to China, got caught and tried to cover it up." The title leaves no room for speculation, it seems to be very strong, accusatory, without even considering another possibility. Hence, it can be assumed that ABC must have strong evidence and data to back it up.

After all, this is the Australian national broadcaster accusing the world-renowned Australian Mint, which is owned by the government of Western Australia. More - the mint itself has its obligations legally guaranteed by the government of Western Australia in the form of the Gold Corporation Act 1987.

The role of the USD as the world's reserve currency was legally sanctioned through the Bretton Woods Agreement concluded in 1944. This dethroned the pound sterling from its position of long-time dominance, to the role of merely one of many currencies in the new system.

The link to the said material is posted below so that readers have the opportunity to read it.

https://www.abc.net.au/news/2023-03-06/perth-mint-gold-doping-china-cover-up-four-corners/102048622

The article by Angus Grigg, Ali Russell, Stephanie Zillman and Meghna Bali begins with strong numbers. According to a purported internal Mint report:

"The historic Perth Mint is facing a potential recall of $9 billion worth of gold bars after it sold diluted or "doped" bullion to China and then covered it up, according to an internal report."

"The report estimated that up to 100 tons of gold shipped to the Shanghai Gold Exchange (SGE) potentially failed to meet Shanghai's strict purity standards for silver content."

The $9 billion mentioned in this case is the Australian dollar (AUD). This does not seem obvious to a non-Australian reader, and the "$" sign creates even more confusion. As proof of the above, 9 billion divided by 3.215 million troy ounces - the amount we have in 100 tons - gives a value closer to the price of gold in AUD than in USD. Even taking into account the m.in. wholesale discounts and lower prices resulting from a long-term commitment.

The second item in the sequence is a discussion of Shanghai's expectations for high purity. ABC uses the word "bars" in the text. However, it later states that:

"Perth Mint confirmed that it had indeed received a customer complaint regarding a small number of 1-kg gold bars, but that "due to Chinese government restrictions on gold exports from China, the customer did not return the bars (...) and therefore the customer's concerns could not be verified."

We are not language purists, but in this case the technical wording matters, because SGE operates within its own standards. Each major gold market creates its own standards and guidelines for delivery. Thus, weight, shape, characters, casting methods, chemical composition, and even possible margins of error are defined. Few retail customers have the need to delve into the technical specifications of the LBMA market, for example, but those who do can easily discover that their 400-ounce (nearly 12.5 kg) gold bar with a minimum purity of 995.0 may actually weigh 10.9-13.4 kg (350-430 ounces).

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Knowing the above, let's focus on the SGE requirements. These are the SGEB1-2019 Gold Ingot and SGEB2-2019 Gold Bar standards, last updated in 2019, hence considered current. What is the difference? SGE recognizes gold bars (bar/bars) as 50 and 100 g and gold ingots/ingots as 1 kg, 3 kg and 12.5 kg. The requirements for bars are more restrictive, and for bars they loosen with size. Bars are divided into 4 categories, depending on the degree of fineness, with the exception of 1 kg, which must maintain the highest standard.

Since in English there is a clear linguistic distinction between "bars" and "ingots," we have decided not to complicate things and in the following text we will refer to "bars" and "ingots" as 1 kg or larger in size. In any case, ABC News should use the word "ingots" and used "bars" for 1 kg. Hence the explanation of terminology.

Another aspect cited by ABC is China's restrictions on gold exports. In general, such restrictions exist. China's gold market is very liquid and is always hungry for precious metals. Typically, imports far outstrip exports, but in the face of a pandemic, China's central bank and customs announced in 2020 that they would simplify procedures for companies exporting gold abroad, following a collapse in domestic demand for the metal in the Chinese market.

Today, most exports go through Hong Kong, although some volumes come from the mainland. Even in January 2023, there were some flows of Chinese gold to Switzerland. However, it should be noted that the volume of imports far exceeds exports. If SGE decided to send the bars in question to Australia for testing, it could fall under the category of temporary export (with guaranteed return), according to the regulations of the General Administration of Customs of the People's Republic of China. This would probably require some additional paperwork, but nothing beyond the scope of good finance and logistics departments.

So we understand that the Australians had the opportunity to test gold, but we do not know where the tests were conducted.

Industry practices and diving into financial statements

ABC continues the thread:

"Gold admixture is somewhat of an accepted practice in the industry and is not illegal, but it poses a high risk to refiners because it reduces the quality of bullion by adding impurities such as silver or copper. Trace amounts of these metals are allowed, but Perth Mint's plan - to stay within the industry standard of 99.99 percent purity - left only a minimal margin of error."

Indeed, gold admixtures are a common and legal practice. Gold purity is determined after refining, and due to different technologies and standards around the world, not everyone does it the same way. Acceptable purity of investment gold in the world is 99.50. It is achieved by implementing the Miller chlorination process. Then, to achieve 99.99+, the gold undergoes the Wohlwill electrolytic refining process. And that's exactly what Perth Mint is doing.

Translating the addition of admixtures into a living example - 0.15 ounces from a 1 kg ingot, at a price per ounce of $1900 is a value of $285. Most customers in Europe and North America expect 99.99 purity. Its achievement is related to the decreasing cost of refining. This is because the variable cost per unit decreases as the volume produced increases. This means that currently the difference between refining to 99.50 and 99.99 for most primary refiners is no longer cost-prohibitive compared to the market's preference for a cleaner product. Of course, the market is filled with 98.6 Austrian Ducats and 91.7 British Sovereigns, Kruggerands and American Eagles. However, they still contain one troy ounce of pure gold, just mixed with the right proportion of silver and copper.

"The Mint began doping its gold as a cost-saving measure in 2018, expecting to save up to $620,000 a year - a tiny fraction of its annual sales".

The authors compare the possible savings obtained in this way to the value of sales. This is a serious error in the article or a deliberate act against The Perth Mint, as it does not take into account the cost of doing business. 602 thousand. AUD saved compared to 18.85 billion in revenue in fiscal year 2018, seems a fraction of the. However, the cost of doing business was AUD 18.76 billion in that period. In 2018, this yielded AUD 10.05 million in profit before tax. After applying all taxes, the total income for the period attributable to the owners of Gold Corporation / The Perth Mint was AUD 6.4 million. In view of this figure, the potential savings of 602,000. AUD already appear to be justified. Especially when compared to 2017, which The Perth Mint ended with an after-tax income of AUD 16.84 million.

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Such a decline in profits can be explained by high production costs. Overall production costs have increased relative to higher output. The price of materials (mix supplied to the mints in the form of "dore") remained at a similar level in 2017 and 2018. So it seems that the only major differences on the financial statements year-on-year are in the cost of goods and taxes. And The Perth Mint has the opportunity to improve just one of them.

"Within two years, this willingness to save would put the mint at the center of what could be one of the biggest gold scandals in Australia's history. From the beginning, there were signs of trouble. Just a few months after the admixture program began, the report says refinery employees identified concerns that silver and copper levels may have exceeded those allowed by the SGE. Nevertheless, refinery workers continued to add admixtures to gold."

Trying to save on material and production costs by holding literally little above the standard required by the customer is always a risky business. In any case, she understood, because in the specific case of 1 kg bars, SGE pays 99.9996 per sample. If the gold alloy is 99.9998, then 0.0002 is the producer's loss. And using accumulation resulting from the law of small numbers, after what time this creates real value. The risk is that a problem in the manufacturing process leaves the manufacturer with no possible margin for error. You may end up delivering a product that does not meet customer expectations and having to fix the problem.

With a long-term contract, The Perth Mint manufactures products. In order to maximize profit, it decided to change its production process to use less material. This was achieved precisely by reducing the internal margin of error. This approach indicates that it was the search for savings that may have come from management structures, not process engineers.

The cost of manufacturing any product consists of 3 key elements, which are labor, material and overheads. In this way, the Perth Mint saved directly on material and some overhead costs.

It is not unusual that for a manufacturing company, production problems must be reported, this is standard procedure. And it seems that after the admixture program began, there were concerns about exceeding SGE-allowed levels of silver and copper. We cannot deny the existence of such problems, but without seeing the internal Perth report cited by ABC News, we cannot verify the allegations described by ABC News.

Withdrawal of 100 tons? We don't think

Ignoring internal quality reports in search of savings could be considered an internal matter. However, ABC News reports that The Perth Mint also tried to hide the inconsistencies when they were discovered. To quote an alleged Mint insider:

"This happened in the first place because of mismanagement of systems and incompetence on the refining side. But once they figured it out, they knew what they were doing. They took deliberate measures to ensure that it did not get out."

SGE's detection of the problem with too little gold content came in September 2021, when SGE, after performing random quality checks, discovered two 1kg bars containing too much silver in the sample.

"If SGE - (...) a client of Gold Corporation (...) - had made public that it had problems with Gold Corporation bars ... the impact of negative public statements on business could be very significant."

Perth officials conducted a purity test, known as an "assay." As a result, one bar fell slightly short of SGE's strict standards for silver content in the alloy. Accordingly, as part of the review of refining practices, new procedures were immediately put in place so that the 1-kg bars were expected to meet SGE requirements with 100% certainty.

According to ABC's news source, employees had previously signaled trouble with compliance, but the refinery continued its austerity practices. As a result of this and the bar test, advice was sought from then CEO Richard Hayes on what to do with the two tested bars, one of which contained admixtures lower than required by the SGE. ABC says Hayes confirmed that only a compliant test should be provided, and that it was after this that The Perth Mint discontinued its gold admixture program on the same day the failed test was discovered.

Note that 2021 was a tense year between Beijing and Canberra, as the sides were involved in a trade war. China imposed anti-dumping duties on Australian wine in March. In April, Australia cancelled two Belt and Road agreements. In May, Australia considered a controversial 99-year lease for the port of Darwin granted to a Chinese company. In May, Beijing suspended the China-Australia Strategic Economic Dialogue and imposed an unofficial ban on coal imports from Australia. In June, Beijing introduced controls on steel production to reduce pollution and overproduction, which hit Australian steel hard. Then in September, Aussies joined AUKUS...

With only these listed, one has to admit that the SGE has refrained from escalation, putting business with the supplier ahead of political bickering. Although, if the ABC narrative is to be believed, she had every reason to do so. She decided to hold off on making her complaint public and accepted the mint's promises of quality. At the same time, SGE has informed customers in China of the potential non-compliance and its willingness to resolve the issue. Given SGE's importance in China's international trade and its aspirations to become a globally recognized brand, it seems that these were very balanced and calm actions.

However, the investigating reporters from ABC News continue:

"Based on the average understanding of size (...) it was possible to withdraw up to 100 tons of stocks from the Shanghai Gold Exchange for exchange," - reads the report."

"But it wasn't just one bad batch, it meant that most of the gold bars during the three-year admixture program were potentially non-compliant with Shanghai's standards."

In the first chapter of our analysis, we made some calculations regarding the value of the mentioned 100 tons. The most important thing for commodity markets is to maintain liquidity. That is - to maintain sufficient stocks. In 2021, the London Metal Exchange did not have enough aluminum stocks, so it halted trading for several days. The LBMA in March 2022 refused to accept new gold bars from Russia, but decided to keep those already accepted into storage as traded. The same is true at the SGE - the bars may have already been the subject of some activity. Consequently, their withdrawal would cause some problems for both customers and SGE and, of course, a large cost for The Perth Mint.

So what could have happened to the incompatible 1 kg bars? Everything is in the specification. Standard SGEB1-2019, paragraph 4.3.4 clearly states:

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If we were not considering 1-kilogram bars, but 3-kilogram bars or heavier, then we could simply relegate them to lower categories, since they are divided into four classes according to their gold content. Non-compliant, intended to meet Class 2 would simply drop to Class 3. However, this does not apply to 1 kg bars.

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Let's speculate on the options: SGE and The Perth Mint have most likely found a mutually acceptable solution to avoid market disruption. Whether it was based on full, partial or random inventory control, whether the problem was minor or escalated, and whether the Chinese side reacted harshly or mildly to the quality problem. Essentially, SGE presented a problem, the Perth Mint conducted tests and responded accordingly by making changes to its process, and both parties remained bound by the agreement. A story like millions in the manufacturing and processing industry. We will probably never know how the parties decided to resolve the quality issue, as this is part of the trade secret specified in the contract between the parties, as well as in the law - for example, The Perth Mint cannot talk about existing or potential customers under Section 74 of the Gold Corporation Act 1987. Besides, it's been more than 1.5 years since the discovery of the discordant ingot. Certainly, if something had to be done, it was done long ago.

Hence, the assumptions put forward by ABC about the 100-ton withdrawal seem not to take into account production and market factors. Let's assume for a moment that ABC is right, the parties have not found a solution, or that SGE has found many more "problematic" kilo bars. SGE would likely choose to place them under warrant (suspension), and The Perth Mint would have to consider gradual remelting in China or in-country. The assumption that the entire batch would be rejected due to non-compliance is rather impossible, as it would mean 100 tons, or 4 months of kilo bar production capacity for Perth. The need to reprocess such a volume would seriously affect the profitability of the mint. Many market members could also be easily discouraged by SGE's uncompromising stance.

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Alternatively, The Perth Mint could seek another buyer for the withdrawn stock, who would accept the bars as compliant. Comex, Sao Paulo, Dubai, Istanbul, Mumbai and Tokyo accept kilo bars. Of course, there is still the question of alloy purity, but we know that SGE has higher requirements than the market accepted. The only problem is that the bars already carry SGE designations. And, of course, this is all assuming that the 100 tons in 1 kg bars delivered in 2018-2021 are still in SGE warehouses and not in private or institutional hands. Otherwise, SGE would have to launch a China-wide recall of sold bars.

Conclusion 1: For private gold investors, the story is more of a "nonevent". There is no reason not to buy investment products from The Perth Mint or not to trust the information provided by the manufacturer. There has never been any doubt that the gold referred to by ABC News does not correspond to the claimed 999.9/1000 sample size.

Motion 2: March 2023 SGE statement., in response, ABC News appears to be rolling out the heavy guns:

"The relevant media failed in their duty to verify the content, resulting in the spread of inaccurate content on the Internet, causing serious damage to the reputation of Shanghai Gold Exchange."

SGE added that it reserves the right to take further action to protect its reputation and safeguard its legitimate rights and interests.

Real problem or internal political games in Australia?

Now, in March 2023, in light of press releases, the LBMA has decided to refer to the incident review process, explaining that any incident or issues that may affect the credibility of the Good Delivery List and the wholesale precious metals market are taken very seriously. The Perth Mint remains on the prestigious London Good Delivery List, however, should an investigation reveal that Perth is not meeting standards, the LBMA may take disciplinary action, which may include suspension of membership or revocation of membership. This would be a major problem for Perth, as SGE accepts ingots and bars produced by London-accredited refiners. Although this seems highly unlikely, as bars produced in Perth would certainly meet LBMA requirements as lower than those from China.

The Perth Mint has addressed the allegations. However, she could not comment on ABC's sources - an "internal report" and an "insider" - because no evidence has been publicly presented.

https://www.perthmint.com/news/media-announcements/corporate/response-to-abc-tv-allegations

It's hard not to notice that what initially appeared to be qualitative inconsistencies and misguided business decisions now appear to be just one element of a broader attack. Within days, ABC News accused The Perth Mint of gold counterfeiting, selling gold to a former biker gang member, recalled an investigation and possible punishment for inadequate safeguards against money laundering and terrorist financing. Even the fact was drawn out when The Perth Mint made a gold purchase from an illegal source in 2020. For this alone, by the way, the Australians have already had to explain themselves deeply to the LBMA.

https://www.abc.net.au/news/2023-03-09/perth-mint-gold-doping-explainer/102070850

Therefore, it seems that one can at least consider the possibility that this is part of political internal gamesmanship within the Labor Party. First, ABC News is a national broadcaster that politically leans to what locals consider the left. In the past, moreover, she has repeatedly been accused of political bias. Australia held a federal election in 2022, resulting in a change of government. Liberal-National Prime Minister Scott Morrison was replaced by Anthony Albanese of the Labor Party.

Western Australia remained in the above camp, although the political divide between the province and the capital was clear. Leftist premier Mark McGowan remains at the head of the district. McGowan has appointed Jason Waters as chairman of The Perth Mint, after Richard Hayes left in 2021.

However, local correspondents - again from ABC News - noted that the country's current prime minister and Western Australia's premier have a number of unresolved domestic policy issues between them, and have even avoided showing up in public together during election campaigns.

https://www.abc.net.au/news/2022-03-06/albanese-and-mcgowan-public-apperance-fails-to-transpire/100880760

Does the Perth mint, in this situation, remain hostage to a political gambit to perpetuate the current premier of Western Australia, who is the legal head of the district-owned mint? This type of hypothesis should at least be considered.