Could Central Banks Be Holding Bogus Gold Bullion? (GLD, IAU, UGL, SLV, PHYS)

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October 10, 2012 11:07am NYSE:GLD NYSE:IAU

“The Post has learned as many as 10 fake gold bars — made up mostly of relatively worthless tungsten — were sold recently to unsuspecting dealers in Manhattan’s Midtown Diamond District.” — New York Post, Sept. 27, 2012


As if we didn’t have enough to worry about with the Federal Reserve’s legalized counterfeiting, surging gold prices have spawned a new generation of gold counterfeiters.

The fake gold bars are not limited to those reported by the Post in New York. At least one gold bar filled with tungsten showed up in England in March.

In experienced hands, the appearance and weight of gold coins and bars is almost unmistakable. By carefully preserving that appearance and replicating that weight, the counterfeiters in these accounts hollow out real gold bars — replacing a substantial amount of the gold with very inexpensive tungsten.

Why Counterfeiters Are Attracted to Tungsten

Tungsten has a specific gravity — an index of density — of 19.25; very close to that of gold, which is 19.32.

For comparison, lead is far lighter, at only 11.34. Although platinum is heavier than gold at 21.5, it is also more-expensive than gold and so would not be used.

[Related: Could The Central Bank Vaults Be Empty?]

Tungsten, a brittle metal, can be difficult to work and to mint in small coins. That is why bars are preferred in tungsten counterfeiting. When gold prices were lower, it was thought that fake bars were limited to at least kilo-size (32.15 ounces) and larger.

It was a tungsten-filled kilo bar that was found in England in March. Photos reveal that the length of the bar had been drilled out in five places, plugged with tungsten, and then sealed back up with gold.

It is estimated that 40% of the gold content had been replaced.

But the Manhattan fakes that turned up this fall are 10-ounce bars that had been constructed of rectangular tungsten blanks, wrapped or plated in gold to appear to be struck bars, and then stamped with hallmarks and serial numbers.

The gold covering was estimated at only about 20% of the bars’ weight; the remaining 80% was tungsten.

These fake bars are clearly produced by sophisticated operations. One Chinese company actually advertises itself as a professional tungsten fake gold coin manufacturer “for souvenir and decoration service.” GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!

It offers the helpful advice, “Here we declare: Please do not use our gold-plated tungsten alloy products for any illegal purpose.”

Speaking of legal purposes, central banks around the world are adding to their gold reserves. Are these “solid” investments, or …

Could Central Banks Be Holding Bogus Gold?

It is impossible to say if even the so-called “good delivery” bars, 100-and 400-ounce gold bars that are held by central banks and are traded by large bullion dealers and on exchanges have escaped adulteration and fraud.

This year the U.S. Treasury undertook an audit of the billions of dollars’ worth of its gold held by the Federal Reserve Bank of New York. For the first time, these bars held by the Fed were subject to test-drilling to check for authenticity and purity.

Whether or not large gold bars held in major depositories, central banks warehouses or even in Fort Knox, for that matter, are reliable is simply unknown. But for most investors, taking delivery of such bars from the commodity exchanges is probably best avoided.

Once these bullion bars have been taken into private hands, the depositories’ chain of custody is broken. 

This means that, especially in fast-moving, chaotic markets when it is likely to matter most, sellers can encounter delays while waiting for testing to be completed before large bars can be liquidated.

Take Care When Collecting ‘Rare’ Coins

Perhaps an even bigger problem is the counterfeiting of numismatic and semi-numismatic coins, collector coins of both gold and silver.

Counterfeiters generally use real gold and silver for these fake rare coins. However, they can derive substantial profits from the high premium prices at which such coins are sold — far above the value of their actual gold or silver content.

Rare-coin trade associations and publications warn that more than a million counterfeit coins manufactured in China have made their way into the hands of Americans.

Numismatics may be fine for the serious hobbyist, but most gold investors today are simply interested in wealth preservation and liquidity in the event of a currency crisis.

The Best Way to Buy Bullion

My recommendation for most investors, even those of substantial means, is to avoid the pitfalls of counterfeit bullion and numismatics altogether and buy the most widely traded of the one-ounce bullion coins, the U.S. Gold Eagle, South African Krugerrand and Canadian Maple Leaf. Other widely traded bullion coins include the Austrian Philharmonic, Australian Kangaroo, Chinese Panda and U.S. Buffalo. GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!

Each of these coins contains one troy ounce of actual gold content. But because pure gold is slightly soft, a couple of them (Gold Eagles and Krugerr ands) have a total weight of just over an ounce. The small amount of added alloy makes the coin more durable.

These coins are recommended because of their convenience and portability and because each of these coins is instantly recognizable and liquid around the world for its uniform gold content.

To satisfy yourself, deal with reputable and experienced people and ask to see and hold several types of gold bullion coins. You can also subject coins to some rudimentary tests of size and weight, sound, and visual inspection.

With these precautions, and avoiding both bullion bars and numismatic coins, you will be at much greater risk of being defrauded by the legalized counterfeiting of the Fed than being victimized by counterfeit gold.

ETF DN Related Tickers: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), iShares Gold Trust (NYSEARCA:IAU), Ultra Gold ETF (NYSEARCA:UGL), Sprott Physical Gold Trust (NYSEARCA:PHYS).

For your Freedom and Prosperity,

Written By Charles Goyette From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed.  Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual   prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and MarketsMoney and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss  Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of  investing, interest rates, financial safety and economic forecasting.  To view archives or subscribe, visit http://www.moneyandmarkets.com/.


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