Counterfeit Gold: How to Protect Yourself

In the last few months, I've noted increasing interest from clients wanting to take physical delivery of their precious metals holdings.  This appears to be a worldwide trend.  Colleagues in Switzerland, Hong Kong, and Singapore have informed me that many of the wealthiest investors in Asia and Europe are now demanding delivery of their gold holdings from bonded warehouses in London, Chicago, and elsewhere. 

Then last fall, a report emerged that China's central bank had discovered 400-ounce gold-plated tungsten bars among those it had recently received from bonded warehouses.  Assays were said to reveal at least four counterfeit bars, all supposedly from sources in the United States. 

I'm not sure how much credence to give this story, and I've not been able to independently confirm it.  Indeed, Bob Meier, a colleague of mine with excellent contacts on the Chicago Mercantile Exchange doubts it could be possible, because all gold bars submitted to exchange certified warehouses are re-assayed to put them in "good delivery" status.  Since 1925, since the modern clearing corporation was developed, Bob says there has never been a seller/buyer or purity default for so much as one micron of metals.

However, if you were going to make counterfeit gold bars, tungsten would be the ideal metal to use.  Tungsten costs about 1/3000 as much as gold, but has almost the exact density.  A tungsten bar plated with gold is almost indistinguishable from the genuine article, because it's virtually the same size and weight. 

Given this opportunity, it's not surprising that you can buy gold-plated articles made with a tungsten core.  One source is a Chinese company called Chinatungsten.  The company's Web site proclaims:

"A coin with a tungsten center and gold all around it could not be detected as counterfeit by density measurement alone."

Larger gold bars are the most obvious targets for counterfeiters.  But recently, a gold refiner in Germany discovered a 500-gram gold-plated tungsten bar submitted to it by a bank.  Watch the video of his discovery here.

The only way to detect a gold-plated tungsten bar is to perform an assay.  And just not any assay will do.  The relatively low cost x-ray fluorescence technique will not detect a gold-plated tungsten bar.  You need very expensive, specialized equipment to perform a non-invasive assay of the entire bar.  A physical assay costs less in most cases, but requires drilling into the bar. 

So, how can you protect yourself? 

If you're a small investor, buy smaller coins and bars one ounce or smaller in size.  These sizes are small enough that a gold plated tungsten fake would be much less profitable.  Smaller sizes also have a different feel due to the brittleness of tungsten compared to the malleability of gold.  Also, buy from a dealer with an impeccable reputation, particularly if you store the gold, rather than taking personal delivery.

If you're a larger investor with holdings in bonded warehouses, you have the right to take delivery of your gold.  Commodity exchanges don't guarantee the purity of the gold bars they deliver, although buyers seldom perform an assay.  This is because the chain of custody requirements bonded warehouses must follow are so rigorous.  However, you have the right to perform an assay of your holdings, or have an expert do so, to verify their authenticity. 

Also be aware of the differences between "allocated" and "unallocated" storage of gold.  Allocated storage means that a bank or warehouse has specific coins or bars that you own set aside.  Unallocated storage means that you have an ownership interest in a gold pool.  Unallocated storage is therefore less expensive and a preferred storage option for many investors. 

However, if a bank or warehouse has counterfeits in its unallocated inventory, it could potentially default on deliveries.  That would almost certainly lead to its bankruptcy.  You would then become an unsecured creditor and apply to the bankruptcy trustee for relief.

The bottom line is that the safest way to own gold is to take physical possession of smaller coins and bars, and store the gold in a safe location.  That way, you avoid any possibility of owning counterfeit gold.

Copyright © 2010 by Mark Nestmann

P.S. If you're looking to buy a large quantity of gold for eventual delivery to a bonded warehouse, Bob says it's hard to beat futures contracts. These positions are for "good delivery" bullion with full vault insurance coverage.  You control the leverage entirely, from only 3% to fully 100% paid. For more information, go to http://www.rmbgroup.com and click on the "free metals report" link.

Comments

[Mark Nestmann]

This from a reader who wishes to remain anonymous:

While it won't detect tungsten counterfeits, the Fisch system (http://www.fisch.co.za/home.htm) to detect bogus gold and silver coins is well worth considering. I've used the Fisch system for over 25-years now and I can attest to the impeccable reliability these instruments offer. I've had only two occasions where Mexican 50-peso gold pieces were detected, failing the "weight" check when subjected to the Fisch system. The coins were drilled and filled with lead. The edges of the coins were re-plated with gold and almost non-detectable to the untrained eye. These Fisch instruments have saved me much angst and aggravation over the many, many years I've used them.