Gold investment coins (gold bullion coins) are among the most common conservative physical gold investment tools for individuals and businesses. This investment tool is convenient, a huge infrastructure has been created for it because in all developed countries, there are dealer networks selling and buying investment coins made of precious metals. In most countries whose population has an investment potential, ownership of investment coins is not subject to taxes and declaration or state registration.
The price for this type of goods is based on the current market price of the corresponding metal and the dealer’s premium which usually equals to 2 to 4 percent of the exchange price when selling, and a commission of a similar amount when buying back from an investor. Gold investment coins weighing one troy ounce (31.1 grams) are most popular among investors since gold and silver are quoted in ounces in international markets. One-ounce investment coins are issued in huge quantities each year (up to several million coins) and normally sold and bought back at a lower premium than fractional coins (1/2 oz, 1/4 oz, 1/10 oz), whose relative minting costs are obviously higher.
The market for gold investment coins is highly competitive. These investment tools are produced by dozens of countries, but over 90% of the market is divided between the products of 7 issuers only, including the USA, Australia, China, Canada, South Africa, Austria and Somalia. Chinese Gold Pandas, American Eagles, Australian Kangaroos, Canadian Gold Maple Leafs, South African Krugerrands, Austrian Vienna Philharmonic bullion coins (Wiener Philharmoniker), Somalia Gold Elephants are the most popular gold coins among investors, dealers work with them most willingly, these bullion coins are most often advertised, and they are always on sale. For example, problems can arise with the Russian St. George the Victorious gold coins in Europe, the USA or Japan as they are relatively little known, but the Krugerrands, Gold Pandas or the Somalia Gold Elephants are always sure to be bought (and sold) with a minimum dealer premium.
The five members of The Magnificent Seven gold investment coin issuers are major gold miners. In 2022, their production figures were as follows: South Africa - 110 tons, the USA - 170 tons, Canada - 220 tons, Australia - 320 tons, and China (world leader) - 330 tons. The combined output of these countries amounted to 37% of the global gold production (3,100 tons in 2022). With such large-scale mining, using this gold to produce popular investment tools is understandable and justified. Simply put, for these countries, minting gold bullion coins is the most profitable way to sell some of the gold they produce.
There is no commercial gold production in Austria, but this rich country has a very substantial gold reserve (280 tons) and it can take advantage of bullion coin market trends and prices by regulating the circulation of the Wiener Philharmoniker.
It should be noted that in the USA, Canada, Australia, South Africa, China and Austria, gold investment coins are issued exclusively at national mints under the orders of authorized government bodies.
Somalia is not among the main players in the gold investment coin market. Gold production in this country is negligible, a 1.9-ton peak was in 2019 and the country is at the very bottom of the list of gold-mining countries. The country simply has neither gold nor foreign exchange reserves at all. Somalia is one of the five poorest countries in the world (by GDP per capita), ranking 4th after Burundi, South Sudan and the Central African Republic. State institutions are practically destroyed, corruption and crime are rampant. Somalia’s exports in 2022 amounted to $0.085 bn, imports were $2.51 bn. With such a trade balance, there is no need to even talk about its economy. The population, at best, lives on humanitarian supplies (every fourth person is on the verge of starvation, according to the UN data); and at worst, they are pirating - Somali pirates have long become proverbial. And such a country has become the largest player in one of the most prestigious investment markets and its gold coins are sold and bought from dealers in all major cities of the world. How could this happen?
Let’s start with the fact that there are no refineries or mints in Somalia. On numerous websites of bullion coin dealers, you can find information that Somalia Gold Elephants (also called African Wildlife Elephants) are minted in Germany, at the Bavarian State Mint subordinate to the Ministry of Finance (by the way, euro coins are also minted there). But there is no mention of the Somalia Gold Elephants on the official website of the Bavarian State Mint (https://hauptmuenzamt.bayern/en/), as well as on the official website of the Central Bank of Somalia (https://centralbank.gov.so/). It is unknown who, when and on what terms concluded the agreement on minting the coins from precious metals denominated in Somali shillings in Bavaria (and whether there was any agreement), there are no documents in the public domain, press requests are ignored by the alleged participants in this strange scheme.
The Bavarian State Mint does not announce the mintage of 1 ounce Somalia Gold Elephants (the most popular coins). The amount of gold used for minting them is not disclosed either. But judging by the fact that this product is sold by all dealers in unlimited quantities, there are millions of ounces (i.e., tens of tons of gold per year); for example, all dealers always have Krugerrands and Gold Elephants on sale, but it is known that up to 6 mn Krugerrands were minted per year. Where does this gold come from and who owns it?
Somalia does not mine even two percent of this amount of gold. The Republic of Somalia placed an order in Bavaria, but it does not have its own gold, so the required metal was purchased, wasn’t it? But the Central Bank of Somalia does not have the money, Somalia is one of the poorest countries in the world. Was a credit used? But what is the point of buying gold on credit on the exchange, paying for the order to be fulfilled at the most prestigious mint in Europe, distributing the coins to dealers so that they could sell them at... the exchange price with a minimum premium? Even a stock exchange genius who is able to reliably predict gold price trends would not play such a game. A genius would just buy futures.
There are two versions explaining the mystery of the Somalia Gold Elephants. According to the first one, the Republic of Somalia simply allowed a certain counterparty to order the minting of coins in Bavaria with the Somalia’s coat of arms and received some royalty. This practice actually exists. Small states (Palau, Mauritius) sell the right to mint their coins even to private individuals. The obverse of coins depicts the coat of arms of the issuing country and the currency denomination, and the reverse of coins shows anything, be it a portrait of the customer, an elephant, or a world conspiracy symbol (there is a Palau coin with Illuminati symbols). But in such cases, the mintage is ALWAYS announced (as a rule, it is a small batch, a maximum of several hundred copies) and it is not difficult to identify the customer as the access to the relevant registers is open. Such gold coins are issued not so much for those who want to invest in physical gold, but for collectors, and a significant aspect of pricing for this product is the rarity premium.
The Somalia Gold Elephants do not fit well into this hypothesis. The “circulation” column for this coin on dealers’ websites features it as “unlimited”. The Somalia Gold Elephants have been minted since 2010 in “unlimited” quantities; they are eagerly purchased, since the impeccable reputation of the Bavarian State Mint is a guarantee of quality. But unlike the practice of ordering gold coins from Palau and Mauritius, in this case, the talk is not about kilograms, but about tens of tons of gold. Who in today’s world can buy so much gold year after year and remain incognito? And why is it necessary to hide the beneficiary of such a successful project?
In our opinion, the second version gives a comprehensive answer to this question. The world’s largest gold trading center is Dubai; there are refineries in the UAE processing gold coming from almost all African gold-mining countries. Taxation and administrative benefits for gold traders are unprecedented in this country; the UAE customs does not require any information about the origin of “raw” gold imported into the country, and for further transactions with it (refining, trading, using as collateral, etc.), it is necessary to provide a customs declaration only. As a result, Dubai became a place where gold mined in Africa by various criminal groups and transported by smugglers is accumulated. The scale of criminal gold trafficking is huge. For example, the UAE imported $1.52 bn worth of gold from Mali in 2016, while Bamako recorded the exports for $216 mn only.
The ultimate goal of the criminal operators of the African gold market is to transform this gold (preferably without a discount, at a price as close as possible to the exchange price) into convertible currency in legal respectable accounts that do not attract close attention from fiscal authorities and preventive bodies. This problem is solved as follows. ‘Criminal’ gold from all African countries flows into Dubai where it becomes the ‘Somalia’s gold’ at the UAE refineries. Of course, Somalia does not pay anything for this gold; the ‘pirate’ republic becomes the temporary owner of the metal, taking it on consignment, in fact. Further, this gold - the nominal owner of which is now Somalia - is exported to the Bavarian State Mint in Germany, under a German-Somali agreement where it turns into gold investment coins - Somalia Gold Elephants - sold through an extensive dealer network around the world. The proceeds from these sales are transferred to offshore accounts (from which money is paid to the real gold suppliers) and are not indicated in any way on the balance sheet of the Central Bank of Somalia.
Formally, it is impossible to make a claim against Germany because gold comes to the Bavarian State Mint under an official agreement, is exported from the UAE and goes through all the required customs procedures in the UAE and Germany. Neither the EU laws, nor the UAE laws, nor even the Somali laws (if they exist there at all) are violated in any way. But the agreement itself is a commercial secret, since it is IMPOSSIBLE to explain where the impoverished Republic of Somalia annually gets several tens of tons of gold for having investment coins minted at one of the most expensive mints in the world.
All participants in the scheme profit from it: criminals sell their gold without a discount, practically at the exchange price, and receive euros and dollars to their legalized accounts; the Bavarian State Mint fulfills a huge order at the best prices; the Somali officials make money on (basically) intermediary operations; dealers earn their premium on the sale of (perhaps) the most popular gold investment coin of the impeccable ‘German’ quality. The investors also usually gain benefit because the Somalia Gold Elephant coins are reliable, well-promoted, and can be sold and bought from thousands of dealers in any civilized country.
Let’s consider all this a hypothesis, until the term “unlimited” is replaced with an exact figure and the real owner of the gold used for minting the Somalia Gold Elephants is known via documents.
Sergey Goryainov for Rough&Polished
