Wednesday, November 18, 2009

WARNING: This is not a recommendation to buy, sell or hold any financial instrument.

DISCLOSURE: I am a BullionVault client and affiliate. BullionVault is a member of the London Bullion Market Association.

A rumor is circulating on various web sites about allegedly bogus London Good Delivery gold bars. The source of the rumor, as far as I can tell, is here:

Gld ETF Warning, Tungsten Filled Fake Gold Bars

First of all, what follows should not be viewed as a defense of SPDR Gold Shares (Symbol: GLD). In my opinion, GLD is just a blinking number that updates in real time. See: Is the GLD ETF Really Worth Its Metal?

Now, let’s turn to the reckless and unsubstantiated rumor that thousands of London Good Delivery gold bars have been hollowed out and filled with tungsten.

Let’s apply logic: If there were thousands of bogus Good Delivery gold bars out there, assays would reveal the fakes and all Hell would break loose. Everyone who relied upon Good Delivery gold bars would assay their bars. Would the victims of such a fraud keep quiet about it? No way. There would be lawsuits all over the place.

Now, I was content leave this story alone and move on, but I started hearing from Cryptogon readers who also happen to be BullionVault clients.

That was it right there. I emailed Paul Tustain, the director of BullionVault, and asked him if he had any opinion on this matter.

Paul forwarded my inquiry to Adrian Ash, BullionVault’s Head of Research, who responded with the message below:

Dear Kevin,

Thank you for your email, which Paul’s asked me to answer.

As you may know, we send independent assayers into the vaults every year to check all the gold bars, and they send their report to our auditors who publish it – on their website – with the full financial audit.

To read the Assayer’s Report

Last year, the assayers were 100% satisfied with every bar. They are now due to return to the vaults later this month, coinciding with our 2009 financial audit. Meanwhile, we only ever accept bars from accredited vaults and refiners, and anyone who delivered us a gold bar which later turned out to be bad would be liable for the loss.

On top of that, we guarantee every gram of BullionVault gold ourselves:

With regards to the alleged tungsten fraud, such fakes could perhaps circulate outside the Good Delivery circuit. But it’s unlikely that any such metal could ever make it into accredited storage.

Accredited custodians only take in bars from other accredited vaults, and metal only enters the system from accredited refiners. Even when they bear the correct bar stamps, large gold bars are not usually accepted from people outside the Good Delivery circuit, which is why taking a Good Delivery bar into private possession seriously dents its value. Any potential buyer, lacking the accredited storage history which ensures integrity, would rather deal accredited metal from an accredited source. It’s this warranty — that delivery is good — which makes the professional wholesale market cost-efficient and liquid.

You can learn more about Good Delivery at the London Bullion Market Association (LBMA)’s website. You’ll note just how exacting the criteria for refining and assaying are:

The Physical Committee’s detailed work on weighing scales is also worth reviewing. Because at these tolerances, the difference in density between gold and tungsten would show in a 400-ounce bar. Their very different melting points (1064°C for gold, 3422°C for tungsten) also make the alleged fakes unlikely, as do their physical states when cooled (gold is soft, tungsten brittle). Following back along the chain of integrity – the formal history of who held the bars, when, and in which approved facility – would ultimately lead to the producing refiner, and no amount of “tungsten” fakes would be worth the law suits, let alone the loss of LBMA accreditation.

As regards the rumours and stories themselves, “Impeccably reliable sources” would never tell an internet blogger that “a number of well-heeled market participants bought…gold futures on the London Bullion Market (LBMA)”. Not because they wouldn’t want to share such information, but for the simple reason that London dealers don’t offer gold futures. Spot, forwards and options, yes. But futures, no.

Nor can anyone trade gold “on” the LBMA, because it is a trade association, not an exchange or the market itself. Nor is gold dealt at the London Metals Exchange (LME) as some authors state. It offers base-metal contracts.

Reliable sources of information would know this. They’d at least look it up before publishing.

Kind regards,

Adrian Ash
Head of Research