What is Pool Allocated (or Unallocated)?

Throughout the world, bullion dealers offer a wide variety of bullion products to investors. In the main these products are physical bars, coins and ingots. In these instances, purchases of these products give customers physical ownership.

However, there are additional products which do not provide legal ownership but provide investors with ‘exposure’ to the movement in price with the physical gold, silver and platinum. One class of product is called ‘unallocated’ and ‘pool allocated’.

Importantly, this this class of product is distinct from other investment products which are offered by the financial industry such as Exchange Traded Funds (ETFs) or Contracts for Difference (CFDs).

Within the Australian market, there are approximately 13 bullion operators who provide pool allocated and unallocated bullion products to Australian investors. These products have been offered in Australia for at least the past 13 years.

However, while these products have been established in the market for some time, they are little understood by investors as there is little disclosure and transparency on what these products are and how do they operate in practice. 

These products have been quite popular among Australian investors given that these products offer several benefits which are not afforded to investors who purely acquire physical bullion.

The purported benefits of these products have included:

• the ability to obtain price exposure at lower spreads (i.e., the ability to invest and liquidate capital out of these products much cheaper than physical bullion);

• free storage; and

• free insurance coverage.

Why the Free Lunch?

Most Australian investors have yet to fully contemplate why these free benefits are offered by bullion dealers and what is the difference between this class of product and purchasing actual physical gold and silver bullion bars and coins.

The saying ‘there is no free lunch’ should be top of mind for most investors. While unallocated and pool allocated products offer attractive benefits, they do come with risks as well.

Unfortunately, many of these risks are unknown to Australian investors due to a lack of disclosure and a lack of transparency.

So why do bullion dealers offer unallocated and pool allocated products?

The main reason is that bullion dealers utilise investor capital in acquiring precious metals (whether in physical or alternative form) which are used for other purposes. These other purposes are mainly to either to finance the inventory of:

• bullion dealerships (i.e., unallocated/pool allocated physical bullion is used as the working capital inventory stock of the bullion dealership); or

• associated manufacturing operations (i.e., unallocated/pool allocated investor capital is used to acquire raw physical metals that is used in the production of bullion products such as bars and coins).

Warnings concerning pool allocated and unallocated products

These risks have long been called out by both American and Australians economists and market analysts. Not only this, but unallocated and pool allocated products do also have the ability to distort the demand and supply fundamentals.

For example, American precious metals analysts such as Craig Hemke from TF Metals Report have long warned that many bullion dealers have operated these products on a fractional reserve basis, meaning that the requisite bullion required to back these products is not held by the bullion dealer.

In such instances, the bullion dealership would misappropriate investor capital for other purposes.

The market effect of this product would be to artificially inflate the supply of physical bullion, meaning the market would think that more physical bullion exists.

In economic terms, this would have a manipulative dampening effect on the price of the specific precious metal.

In the Australian context, warnings of unallocated and pool allocated products came in March 2021 by economist and Adams Bullion Managing Director John Adams when he went public over concerns regarding the Perth Mint’s unallocated and pool allocated products.

During this period, Adams called out the Perth Mint for its inability to deliver on redemptions made by unallocated and pool allocated clients consistent with its terms and conditions. The Perth Mint scandal was the talk of the bullion industry across the world.

In addition, Adams, during this period, appeared in several videos across the world with bullion leading experts about unallocated and pool allocated videos in which he stated:

• investors do not have acquire legal ownership of physical bullion via unallocated and pool allocated products, rather investors acquire a contractual obligation (or ‘a promise to pay’) from the bullion dealer;
• given this, investors expose themselves to counter-party risk directly with the bullion dealership; and
• investors who have little visibility and transparency (including independently verifiable data) as to how their capital is utilised and whether unallocated and pool allocated product is fully backed by physical bullion.

The videos by Adams inspired analysts around the world such as Chris Marcus, Rob Keintz and Daniel Vigario to conduct further investigations into the Perth Mint where they were able to expose further operational and financial anomalies that confirmed the original allegations of Adams.

Lack of Legal Protections

What most Australians fail to appreciate is that the physical bullion industry is very much like the wild west. There is very little specific regulation focused on the industry as physical gold and silver is not considered a financial asset under Chapter 7 of the Corporations Act 2001 (specifically section 763C).

This means that the licensing of bullion dealers as financial services businesses, the registration of bullion products and the provision of disclosure documents such Product Disclosure Documents does not occur in Australia.

Regulation of Gold, Silver and Platinum Exposure Products

However, having said this, there is a distinction between purchasing physical gold and silver bullion as opposed to entrusting your financial capital to a bullion dealer who will purchase physical bullion as part of an investment pool.

This distinction was the basis for John Adams to submit a report of alleged misconduct to the Australian Securities and Investments Commission (ASIC) in November 2023. The report, backed by independent legal advice, suggested that:

• unallocated and pool allocated products met all the elements of a managed investment scheme (MIS) as defined by Chapter 5C of the Corporations Act 2001;
• unallocated and pool allocated products were financial products as defined by Chapter 7 of the Corporations Act 2001 and thus bullion dealers were required to hold an Australian Financial Service License (AFSL);
• bullion dealers were required to provide investors a product disclosure statement explaining what unallocated and pool allocated products are and the risks they pose to investors; and
• ASIC was already regulating investment products involving bullion such as ETFs and there was little distinction between regulated investments products and unallocated and pool allocated products.

As part of his report, Adams offered examples of bullion dealers making public claims about their unallocated and pool allocated products which were blatantly untrue.

The Adams report of alleged misconduct resulted in ASIC conducting an investigation from November 2023 to August 2024. Significantly, this was the first instance in Australian history that unallocated and pool allocated products were formally investigated by ASIC.

The investigation concluded with ASIC taking no action against any entity within the Australian bullion industry.

The main conclusion to draw from this outcome is that unallocated and pool allocated products are not financial products and thus legal protections designed to protect investors do not apply.

Adams and others in the Australian bullion industry believe this leaves investors in a significantly vulnerable position.

The Approach by Adams Bullion

Adams Bullion is not only committed to complying with Australian law but doing so both transparently and ethically.

Given that investors do not have any legal protections afforded under Chapters 5C and 7 of the Corporations Act 2001, our paramount concern is about ensuring that our offer to investor is fully transparent and free from any material misstatements.

While our primary belief is that investors who wish to preserve their wealth should purchase physical gold and silver bullion, we recognise that some investors want the benefits that unallocated and pool allocated products are willing to accept the associated risks.

Given the existing demand in the market, Adams Bullion offers pool allocated products in gold, silver and platinum.

For those investors who invest in these products, Adams Bullion offers free storage and insurance arrangements as well as attractive spreads (i.e., the ability to invest in and liquidate out of these products).

However, in exchange, Adams Bullion will put your precious metals to work in our business as working inventory capital.

This means that your investment capital is fully accounted for in our supply chain, whether it is physical precious metals in store or on order from either our wholesalers or refiners, Adams Bullion’s pool allocated product will be fully accounted for by metal, to the troy ounce.

For the first time in Australian history, Adams Bullion has produced the most transparent unallocated and pool allocated offering in Australia’s bullion industry.

If you have any questions, please feel free to contact our store and speak to one of our representatives.