Gold - did you know?

Chain of Integrity - And Age Old Problem



During the Spanish occupation of many South and Central American countries in the 15th through 17th Centuries, much Gold was taken back to Spain via Fort San Lorenzo in Panama. Panama held the Gold awaiting shipment back to Spain under heavy artillery guard. When Spanish galleons would arrive at Fort San Lorenzo, they would be quickly loaded and sent on their way bound for Spain's refinery. On their journey back to Spain, the galleons would be attacked by pirates, normally British. However, when the pirates acquired the Gold, they had difficulty selling it even on the black market because its authenticity of purity would come into question.

This issue of authenticity guarding against counterfeiting is as old as the subject of precious metals themselves.


COUNTERFEITS

For most of history, coins were valued based on the precious metal they contained. Whether or not a coin was actually made by the claiming party was of secondary importance compared to whether or not it contained the correct amount of metal, i.e., correct weight and fineness (purity).

Unlike Silver, Gold is denser than almost all other metals; hence, when something is made of Gold, it is extremely hard to fake. Simple determination of weight and volume should be sufficient. A coin that is the right size but is not Gold (or has too much base metal) will be "light;" alternately, a coin that weighs correctly will be somewhat larger.

Platinum was unknown in ancient times. Platinum is denser than Gold, but since the price of platinum is currently higher than that of Gold, making a fake coin out of platinum would make no sense. In theory, fake coins could be made of uranium, but this also is not a practical solution. One element that has approximately the same density as Gold is tungsten. Alloying Gold with tungsten would not work for several reasons, but a coin with a tungsten core and Gold all around it could not be detected as counterfeit by density measurement alone. This would take extra scrutiny with possibly an X-ray test to scan the interior of the coin. The other ultimate test is to have the coin re-refined.


BITE TEST

bite test

An old practice to test whether a Gold coin was counterfeit was to bite down on it. Since pure Gold is relatively soft, any base metals mixed with the Gold to lessen its value will also harden the coin, and thus make it harder to bite on.

The majority of bullion counterfeits (of all types) are rare and fairly easy to detect when comparing their weights, colors and sizes to authentic pieces.

This is because the cost of reproducing any given coin precisely can easily exceed the market value of the originals.


SMALL COIN & BAR MARKET

Everyone needs to realize that Gold must go through the refiner's fire before becoming pure enough to be money and a store of wealth. Without a refinery stamp on the Gold guaranteeing authenticity of purity (such as Spain's stamp in the earlier pirate example), people simply don't trust it. This has been an age-old problem going as far back as ancient Egypt. So be careful what type of Gold pieces you purchase lest retesting or even re-refining may need to take place for authentication purposes.


BANK BARS

The standard Gold bar held as Gold reserves by central banks and traded among bullion dealers is the 400-troy-ounce (12.4 kg or 438.9 ounces) Good Delivery Gold bar. These bars are for the larger purchasers totalling at current prices of approximately half a million US$ dollars each. There is no sure way to actually test the interior of these large bars with a depth thickness near 2 inches per bar. Not even new methods of X-ray are dependable enough to ensure purity all the way through to detect an inferior metal such as tungsten. The only sure way is by putting the bar back through the refiner's process and melting it back down at great expense to the owner.


ONE IN A MILLION

In the next few sections of this article, I am going to share something with you that very few people know about in my industry. The reason very few people know about it is because only a small percentage of the population can afford to buy large quantities. When buying large quantities of Gold in smaller forms, large purchaser's can face a problem. Let's say you were to purchase US$2Million or more worth of Gold in small ingots, coins, wafers or small bars. To do this is no problem at all; however, an issue arises when you want to liquidate such large quantities back into cash!


NOT SO EASY

Think about this for a moment: If you had US$10Million in one-ounce Gold coins, this would physically be just over a quarter of a tonne in Gold! Now imagine loading your car up and heading down to your local coin dealer or jeweller to liquidate your Gold into cash. Firstly, the average car would be sitting on its axles looking quite odd as you drove down the highway which would draw considerable attention to yourself along with running the risk of being pulled over by the police and having to explain just exactly what you were up to. Then upon arriving at the coin dealer, the proprietor would want to inspect all of the coinage for authenticity if he accepted to transact. This would take him literally a few weeks to do so without attending to his other clients. Also consider the multiple security issues between your premises and the coin dealer's premises. Then comes the clincher - most coin dealers just don't have US$10Million in the bank to accommodate such an acquisition in one transaction.There are so many other issues to consider when it comes to larger liquidations, but there isn't time to go into them here. I am sure you can think of some once you begin to think on this subject in real practical terms. It's just not as easy as most people think it is to liquidate Gold into cash.


LONDON BULLION MARKET ASSOCIATION

Bullion refers to Gold that has been refined to a specific purity of 999.5 parts per thousand or better. Bullion that is refined to this degree or higher by an LBMA-accredited refinery is certified as money in the LBMA system. This is why the refiner's stamp is important on any articles of metal to clarify authenticity.

The LBMA is the London Bullion Market Association that represents the wholesale Gold and Silver bullion market in London. London is the focus of the international OTC (over-the-counter) market with a client base that includes the majority of central banks, producers, refiners, fabricators, security vaulting companies and traders globally. The LBMA Good Delivery List is widely recognized as representing the de facto standard in Gold and Silver bar quality based upon the stringent criteria for assaying standards and bar quality that an applicant must satisfy in order to be listed. For bullion to be recognized by the global financial system as money, it must be certified by an LBMA-accredited firm on the Good Delivery List.There is a great deal of confusion amongst the amateur segment of “bullion intermediaries” in terms of not understanding that Gold is actually money. Once Gold has been refined and certified with the stamp hallmark of an LBMA Good Delivery refinery, this Gold is now recognized as money in the global financial system.

As money, LBMA certified and hallmarked Gold is never discounted; you cannot get a discount on money. - Take Note!


THE NEW GOOD-DELIVERY ERA BEGINS

In 2001 the World Gold Council through the LBMA introduced a new standard to monitor integrity within the LBMA system. Eight refineries from around the world were initially invited to participate as “referees.” To qualify they needed to demonstrate high-assaying abilities along with the capability of high-quality manufacturing of homogeneous samples. Five joined and three declined for unknown reasons. The five referee refineries are as follows:


• Argor-Heraeus SA - Switzerland

• Metalor Technologies SA - Switzerland

• PAMP SA - Switzerland

• Rand Refinery Limited – South Africa

• Tanaka Kikinzoku Kogyo K.K. – Japan


I find it very interesting that none of the referees are companies initially founded within North, Central or South America. These five referees receive samples from all of the other LBMA members to insure that quality standards are maintained within the refining process. If Good Delivery purity standards and manufacturing are not met, LBMA members will lose their membership status.


SECURITY VAULTING AND TRANSPORT

There are three vaulting and security companies within the LBMA system that meet approval to be accepted. They are:

• VIA MAT International Limited

• G4S International

• Brink's Limited


INSURANCE

I know personally that VIA MAT's security vaulting and transport is insured by an underwriter of Lloyd's of London insurance. In walking around VIA MAT's vaults, each vault is segregated by two-foot thick security vault doors. The actual insurance on each vault door is US$50Million. When the contained metal value exceeds this insurance value, another vault is required to remain within insurance parameters. By having insurance initiated in this manner, the insurance covers the replacement of the Gold itself. In comparison, many insurance companies only insure safe deposit boxes by dollar value. When the Gold exceeds this value, the insurance will not be sufficient to replace total ounces of Gold in storage.


SYSTEMIC RISK

So how does someone purchase large quantities of Gold given the current systemic risks within the banking system today? Many banks over the past few years have simply collapsed or been taken over by larger banks, because their balance sheets have been „written down‟ by many billions and trillions of dollars. Not only that, there is also large counter-party risk on the bank's books. If a bank offers storage of Gold, yet on the other side of their business their assets are becoming less valuable or worthless, this puts the Gold in storage under considerable risk in the case of a write down of the bank's assets, or worse, collapse through bankruptcy.


THE CHAIN OF INTEGRITY

Large investors are looking for solutions to take Gold outside of the system away from systemic risk. This is achievable by vaulting with companies that are able to keep large bank bars within the LBMA chain of integrity yet outside of the banks. The informed and educated large purchaser seeking wisdom in this area soon realizes it's a two-way street.

It's one thing to purchase the metal but entirely another matter when it comes to liquidating large quantities. So long as the bars remain within this chain of integrity and the investor has access to a company that has a refinery account (very hard to obtain), the bar can be trucked back to the refinery. So long as the refinery can verify the bar has not left the LBMA chain of integrity (with supporting documents to prove it has not), the authenticity will not be questioned. This then saves the bar from being re-refined, saving the investor a considerable amount of time and money.


Example:




TAKE NOTE

Within today's current system there are many accredited investors who lack the sophistication to realize that by not staying within the chain of integrity, they will have issues in liquidating metal holdings of large quantity. Even in the recent past there have been particular banks which have asked their clients to remove their Gold and Silver holdings outside of the system not realizing that they have broken the LBMA chain of integrity.


Until next time,

Simon Heaps






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