New RBA Gold Audit Disclosure

Discussion in 'Gold' started by Bullion Baron, Sep 3, 2019.

  1. bron.suchecki

    bron.suchecki Well-Known Member

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    Businesses that use physical gold run things either of two ways:

    Buy & Hedge
    1. Borrow money
    2. Buy gold
    3. Sell futures contract
    4. Make gold widget
    5. Sell gold widget
    6. Repeat steps 2 to 5
    7. Extend bank loan from step 1 and roll short futures contract from step 3 as required
    Lease
    1. Borrow gold
    2. Make gold widget
    3. Sell gold widget
    4. Buy gold
    5. Repeat sets 2 to 3
    6. Extend lease from step 1 as required
    If a gold business can lease they would rather do that as it is simpler.
     
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  2. 66rounds

    66rounds Well-Known Member Silver Stacker

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    So essentially leased gold is used as manufacturing material and then returned in like form? That makes sense. Its a hell of a lot more productive than just locking gold up in a vault thats for sure.
     
  3. bron.suchecki

    bron.suchecki Well-Known Member

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    Returns currently are very low and leasing by CBs has certainly reduced. In the case of RBA, as the FOI disclosed they are leasing to Perth Mint so they probably see no risk, hence any return is better than paying to store at BoE. You can see from the first chart in this post https://goldchat.blogspot.com/2018/10/is-australia-on-555-gold-standard.html that the RBA reduced the amount of gold it had on lease as lease rates declined.
     
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  4. bron.suchecki

    bron.suchecki Well-Known Member

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    Yes it is, and that is why you will see dealers offering unallocated accounts. It is also what the previous company I worked for monetary-metals.com was all about.
     
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  5. 66rounds

    66rounds Well-Known Member Silver Stacker

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    Thank you Bron for the time you take to share your experience and understanding with the rest of us on this forum. You are a true credit to stackers globally.
     
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  6. leo25

    leo25 Well-Known Member Silver Stacker

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    The Buy & Hedge one i fully understand. But I'm still stuck on the lease one, sorry in advance for my lack of understanding.

    First off why would the Perth Mint lease Gold that is stored in England, wouldn't the transport cost make it infeasible? Or is the leasing from BoE just an accounting, but is really taken from somewhere locally? (though isn't the RBA gold allocated?)
    Second, if they sell the gold "widget" before they repurchase the gold on the open market to return, how can they determine what to charge as the price of gold might increase later. Wouldn't you need to know the total material cost before you sell your "widget".

    If you could explain the mechanisms in a more detailed real life process it would be much appreciated.
     
    Last edited: Sep 17, 2019
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  7. alor

    alor Well-Known Member Silver Stacker

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    when bank bail out is buying over the asset books etc like houses buildings
    there are others that guarantee delivery of gold
    so central bank loan the gold to meet member bank's commitments in gold
     
  8. bron.suchecki

    bron.suchecki Well-Known Member

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    It is quite rare for a CB to directly lease to a user, CBs usually lease to a bullion bank who then on lends it. In any case, a majority of these transactions are done via London, as it is an established central point for clearing trades. First, while the RBA has allocated, it would be converted to unallocated. A refinery receives physical from miners and after refining they usually either:

    1. Sell it to the refinery for cash. In this case the refinery would sell the unallocated they leased in London to generate the cash.
    2. Miner needs unallocated credited to their account in London (to settle financing transactions they have done, or forward sales etc) so refinery would transfer their London unallocated to the miner's account.

    In both cases the refiner loses London unallocated but gets title to physical in their business. This effectively means they swap from unallocated in London to physical in their business.

    When they sell whatever gold product they have made, they are immediately buying unallocated on the open market, so they know what the "cost" of the gold is/will be. Same with the hedging by futures example, they sell the product and immediately buy replacement gold.
     
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  9. GoldenEye

    GoldenEye Well-Known Member Silver Stacker

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    I can think of a third reason for borrowing gold; and that's to pass an audit.

    I've heard of it being done at a laboratory that leased equipment for a few days to enable a compliant audit. The plan came unstuck when a whistleblower later informed the auditor, who returned a few days later for a surprise check. The laboratory lost it's accreditation and the whistleblower lost his job.
     
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  10. leo25

    leo25 Well-Known Member Silver Stacker

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    Thanks @bron.suchecki for taking the time to explain how the mechanisms work. :)
     

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