Download a free sample issue today! FEBRUARY 2010 ISSUE
If you order now, I will add a FREE special report called 7 Steps to Buying Bullion Without Getting Burned. It explains how to buy, when to buy and what not to buy. It also includes my personal assessment of some of the largest coin dealers in the U.S. Get the inside scoop on which dealers give you a fair price with good service and how to contact them.
SUBSCRIBE NOW!
A Betrayal of Trust
In October, Rob Kirby dropped a bombshell with the news that doctored gold bullion had been found in an LBMA certified vault in Hong Kong. Four hundred ounce “Good Delivery” bars had been “gutted and filled with tungsten.”
Additional information Kirby shared in November expanded the scope of this fraud. According to his sources, approximately 60 metric tons of these phony bars were discovered, and Chinese officials arrested the alleged perpetrators believed to be part of an organized crime syndicate. Kirby also reported that about 15 years ago, between 1.3 and 1.5 million tungsten blanks were produced and plated with gold, forming counterfeits of 400 oz. Good Delivery bars. Then 640,000 were shipped to Fort Knox, and supposedly are held there today. The remainder of the fake bars were sold into the market, likely held in bullion vaults around the world.
If true, this would total almost the entire declared US gold holdings of 8,133.5 tons or 261 million ounces. This would be a debasement of the currency on an unprecedented scale.
When I was a bullion dealer, I was always on the lookout for counterfeits and tampered bars. Fortunately, most fakes can be detected easily by weighing with a decent scale, as base metals have a different density from the precious metals. They usually have a different “ring” when struck lightly. In addition, most counterfeiters use lower quality engraving and stamping, so fakes can be detected by looking for errors.
About 20 years ago, some 100 oz. silver bars were drilled and filled with lead and aluminum to produce a bar of approximately the right weight. According to Richard Nachbar of coinexpert.com, the FBI detected the doctored 100 oz. Engelhard silver bars by using an industrial X-ray, and cutting open the bars that had an oddly dark interior. The dealer community believes that all that phony bullion has been discovered and destroyed by now.
In contrast, the use of tungsten indicates a very sophisticated fraud. Although tungsten is much cheaper than gold at about $70 per metric ton, it has the highest melting point of all the pure metals at 3422 °C, or 6192 °F. Criminals can’t work it in their garage like lead or tin. Tungsten has the almost the same exact density as gold, so weighing the bars will not detect the tampering.
Even more disturbing is the subversion of the Good Delivery system. This system was designed to form a circle of trusted entities who would accept each other’s gold and silver bars “without question.” This bullion moves from refineries carefully screened by the LBMA to similarly validated warehouses or central banks in an unbroken “Chain of Integrity.” In many cases, these relationships go back decades.
A fraud of this kind means that at least one entity formerly beyond reproach has been deeply compromised. If you can't rely on the Good Delivery bars, what can you trust? These bars are supposed to have a guaranteed purity and then never leave the custody of trusted individuals so that investors don't have to assay them. Panic is likely to break out among professionals as the news of this fraud spreads. Large investors like hedge fund managers and sovereigns will demand careful examinations of their holdings.
When this story first broke, Chinese scammers were assumed to be the source of the counterfeit bars. Not only are they known for fake bullion like copper filled “silver” Panda coins, but a Chinese website claims to make gold-plated coins. In addition, China holds 75% of the world’s reserves of this useful metal, and has become increasingly reluctant to export it. The credibility of Kirby’s report is bolstered by a similar fraud uncovered in Ethiopia in March 2008. The central bank discovered that some of its gold was plated steel when it attempted to send bars to South Africa. Upon launching a full investigation of its bullion holdings, the central bank found another counterfeit batch which had been in its vaults for several years.
Bullion scandals have reached even the well-respected Royal Canadian Mint. It’s reputation was tarnished this summer when it admitted that over a half ton of gold was missing. After a police investigation, the Mounties reported "there was no theft from the mint. An external review has gone on that provides an explanation of the unaccounted for gold."
Now senior officials claim that the discrepancy can be explained by “double counting” and an incorrect estimation of gold shrinkage during processing. These explanations are not credible. Gold is very dense and shrinks only a tiny amount in the refining process. In addition, an extensive audit by Deloitte this year found no bookkeeping errors, in contradiction to statements from the RCM.
The auditor did recommend "an assessment of potential inappropriate activity by both internal and/or external parties.” Once theft is ruled out, it’s likely that the culprit was acting on covert orders to divert the C$15.3 million in gold elsewhere.
Significance
I believe that Rob Kirby is a trustworthy individual, or I would not pass on his information to you at all. Unfortunately we have no independent corroboration of the story at this time. Nevertheless, it fits into the information that we already know about central banks covertly leasing gold and double counting (or more) reported gold holdings. GATA has pointed out repeatedly that swapping, leasing, and paper games were necessary to keep the gold price down as the central banks didn't have the metal they claimed.
We know that people like Larry Summers believe that selling gold is essential to propping up the dollar. GATA has proven extensively that governments could not possibly hold the amount of bullion they claim. How much more effective would the scheme be if some of the “gold” was merely gilded base metal? With tungsten, it would look and feel correct, giving a false sense of security in any minimal audit. While forging documents and stealing carefully guarded wealth would be very difficult for a criminal gang, it would be simple for a central bank, especially one protected by many levels of secrecy. If Kirby’s source is correct, the US central bank, the Federal Reserve must be complicit in this scheme to inflate the perceived supply of gold.
As I discussed in greater detail in my June article, “The Hypocrisy of Lawrence Summers,” the yellow metal is suppressed in order to make the US dollar appear stronger. Summers served in the US Treasury at the time this alleged fraud was concocted, which would have been involved in any deception of this magnitude. The scheme is designed to hurt America’s creditors, who base their investments on the apparent worth of the currency. The value of the US dollar is directly related to the belief that America really holds over 8,000 tons of gold, more than twice as much as any other nation.
Perhaps this explains the duplicate bar numbers that have been reported in GLD as far back as 2004. In order to seem legitimate, the phony bars would require a real serial number. One could be the real bar and the other could be the clever counterfeit. Just this fall, GLD edited its publicly available bar list to be significantly shorter than it was in September, perhaps to hide the duplicates from detection.
To read more of this article, you need to be a subscriber.