bron suchecki said:
HeavyMetal said:
There are plenty of business sectors that have rapid changes in demand. In fact just about every commodities miner is subject to major demand volatility, and they have much longer infrastructure development timeframes and much greater capital costs than Perth Mint. There is nothing unique about precious metal demand volatility. No mining company can accurately predict commodity prices years into the future either, but they still manage to make demand forecasts.
Interesting comparison. I'll just note one material difference between the Mint and mining companies they have the ability to raise capital from investors willing to take risks. Our (one) shareholder has a very high risk aversion level and limited funds spend $100m on their Mint so they can make more coins for many people who aren't voters, or spend $100m on a new wing for a children's hospital etc.
Yes, the comparison applies to the miners of precious metals too. As part of the supply chain, they are affected by similar (but indirect) demand volatility as the Perth Mint.
Public and private mining companies can also have risk averse majority shareholders, just like Government-owned Business Enterprises (GBEs). When this occurs, debt financing rather than equity financing can be considered for either type of entity. The bankers, venture capitalists or other financial lenders provide the funding, often without any further investment from the shareholders.
The additional funding does not need to be sourced from general revenue, and it does not have to be provided at the cost of a new wing for a children's hospital, or any other politically sensitive area.
But your argument seems to conflict with advice that you have given in a previous post to this thread:
Perth Mint is unique amongst WA Government enterprises in that our mandate is to make a profit and we do not get ministerial directions as to how to do that. Utilities like water and electricity are for profit but their activities are politically sensitive so probably do get more "direction".
Does the Perth Mint have autonomy or not?
bron suchecki said:
HeavyMetal said:
The point that you have actually made is that demand is NOT related to precious metals prices. You have said that demand has increased recently with lower prices, whilst in the past demand and price have moved in the same direction. When a premise sometimes predicts economic behaviour and sometimes doesn't, then it is invalidated. It is particularly useless if the proposed relationship breaks down at the "stress points", when the predictive ability is most needed.
Exactly. I had observed a good correlation between demand and price but that has recently broken down. It was not much help anyway as price is not forecastable.
I think that we agree that price is not forecastable. In any case, you have confirmed that PM operations do not rely on absolute price levels. Forecasting demand is the issue.
bron suchecki said:
HeavyMetal said:
In other words, predicting demand is not the same thing as predicting price. If price did predict demand, then no drinks would be sold at nightclubs and no pies would be sold at football matches, when people could buy them elsewhere at much lower prices.
It is not price that predicts, but movements/trends in the price. The best relationship I've observed was between new highs in the gold price after which we'd see an increase in the number of Depository accounts being opened.
My assertion is that price does not predict demand at all, neither in absolute terms nor in trending terms. Price and price movements are an outcome of the interaction between supply and demand, not an input. It is not a simple relationship, especially for precious metals, where the amount of very volatile speculative demand can often exceed more predictable demand from manufacturing and underlying investment.
At the risk of heading into conspiracy theory territory, I would also suggest that price signals are also often corrupted by paper precious metal futures contracts, so even a theoretical influence of price on demand would get negated.
bron suchecki said:
HeavyMetal said:
Not a major upgrade? That's not what the Perth Mint said in its website blog entry of 21 April: "By July we will have effectively doubled our manufacturing capacity, ensuring that we are able to meet the tremendous interest in our 10oz, 20oz, 1kg and 100oz cast silver bars." No mention that they would only be able to meet the tremendous interest for 3 months, when the silver price dropped, and all bar sizes were made unavailable for sale.
No it wasn't a major upgrade, we had other work planned and added in a bar line for silver which doubled our silver bar from a small base. We didn't expect demand to increase by way more than double so quickly. There is not much point in continuing this line of discussion because you believe we should have known/it was obvious that demand was going to increase so much so quickly.
I don't believe that it was obvious that demand would increase so quickly. I think that I would have thought it likely on the balance of probabilities, but there is never any guarantee.
I have already agreed that forecasting precious metal demand is not easy. The issue is how to manage demand despite the volatility. There are a range of actions that can be taken to cope with volatile demand, and I have already suggested a few of them. There are also a range of ways to mitigate risks associated with these actions.
bron suchecki said:
HeavyMetal said:
And why is the Perth Mint so afraid of making a decision? In the worst case scenario, maybe the mint could expand production, and bring it online just as demand drops. So what? The decision could still be justified based upon the information available at the time. The investment can still be written down.
Do you really expect WA taxpayers to riot in the streets? Over a written down investment and the possibility of a reduced dividend to the WA government? When governments already waste millions more themselves, and bail out private banks who don't ever pay them a dividend?
I made the point above about our shareholder. We are not an ASX listed company who can take risks because their shareholders are willing to do that for the return. Our shareholder is interested in a dollar return, but not at the risk of votes. If we did spend a heap and then it had to be written off, the opposition would use that against the government as an example of financial mismanagement.
ASX listed companies need to balance return on investment with community opinion as well. Most major listed companies have a public relations department to manage community opinion, and to lobby politicians when needed. They also have competitors ready to exploit any adverse community reactions. I don't think that the situation is hugely different for the PM, although I do agree that it would be better if PM was not government owned.
bron suchecki said:
HeavyMetal said:
But I am again surprised that the current situation is the first time that you have seen high demand with lower prices. Almost everybody I know in the precious metal community was complaining that they could not source silver during the 2008 price correction. Did the Perth Mint have huge stocks for sale that nobody knew about?
Of course there was high demand in 2008 but I consider that an exceptional circumstance where the previously observed investor despondency at low prices being overridden by the unique economic situation at the time. Once that was over, we sort of got back to the usual market behaviour until now.
2008 was too special to read anything into IMO in terms of a sea change in investor behaviour. I consider this recent strong demand in the face of falling prices far more significant because there is no high profile single event driving it it is I think the beginning of a capitulation by investors that no rabbits will be pulled out of hats, so time to stock up while you can.
I think that it's too easy to put down the repeated inability to supply the market down to exceptional circumstances.
Yes, there was a financial crisis in 2008, and the PM could not be expected to build its business model around such an extreme event. But then it was also an exceptional circumstance that bar sales were suspended while the production facilities were upgraded. As for now, exceptional circumstances could be attributed to the European sovereign debt issues and pending defaults.
We might still have a few more exceptional circumstances still to come over the next few years. Does the PM have any contingency plans in place to deal with them?
bron suchecki said:
HeavyMetal said:
Future demand can be "locked in" and therefore made more predictable (and bankable). As already mentioned above, the PM could accept orders subject to delayed delivery when inventory is down and production capacity is limited.
We have done this in the past but we are not comfortable continuing to take orders beyond say three months at some point you have to say stop because it is clear you're not able to meet demand. Taking orders for deliver in 6 months say is pretty much the investor running a Depository account.
The point here is that if the PM has to take orders with deliveries stretching out to 6 months or more, then that is justification for further investment in production capacity. Future demand has been locked-in. The risk of over-investment has been mitigated.
bron suchecki said:
HeavyMetal said:
The PM could also reduce delivery delays by using alternate, non-production methods to increase inventory. Like increasing product buy back prices. Maybe even to above the nominal paper-based spot level, if the demand is high enough.
Generally when demand is high there is no or little selling back. Increasing the buyback premium I don't think is going to suddenly make more people let go of their silver. The premium is a small part of the return the investor gets, their selling decision is more driven by the metal price. All increasing buyback premiums would do is take buyback volume from coin dealers and this forum.
Perth Mint does not engage in dynamic pricing as a policy, both on the buy and sell side. This is because it would simply hurt our coin dealers, taking business from them. We sit in the market at fixed premium (a RRP if you like, on both selling and buying back) and everyone knows what that is and this gives space for coin dealers and private traders to compete and make a market. I can't see that policy changing.
As you say, the selling decision is driven by the metal price. Agreed. But increasing the buyback premium effectively increases the metal price. The current buyback price is a discount to spot, and the discount is not specifically listed, it is just part of the buyback price.
Increasing buyback premiums would increase PM inventory, which would provide more supply to dealers and this forum. The value added by dealers and this forum is in the enhanced distribution network. They can't distribute if they can't source from their major supplier.
In any case, my suggestion was only to increase buyback prices on PM product. If raw silver supply is not the issue, there is no benefit to PM in paying a premium for non-PM product. There is no need to compete with dealers for non-PM product.
The alternate buyback proposal would most likely send more non-PM product to the dealers anyway, when potential sellers see the buyback difference at PM. PM meanwhile, can still source raw silver from regular suppliers. Everybody wins.
what we are really saying is when silver is up perth mint can supply, now its dropped they not supplying. dont believe the production story myself. they are having their cake and eating it.
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