Gold Sales - Scams and Big Money

Neil Charnock
www.goldoz.com.au
Apr 9, 2009

Today I am offering some information on the hidden world outside the mainstream gold trade and investment scene. There is much ignorance and confusion on the subject - scams, victims, criminals, legitimate business and big money. It is an essential trade for many economies and for people that rely on gold sales for their survival. What a great subject - intrigue, scandal, danger, survival, opportunity and excitement!

Introduction

I want to offer some education to investors about a side of the gold market little understood by many gold traders, finance professionals and most private investors. Most of the public outside these groups remain clueless about where to even buy gold this early in the gold rally which is actually a good sign for the rest of us.

Much of the gold trade I refer to comes from South America, parts of Asia and more so from Africa. National Geographic produced an excellent article in January this year; "The Real Price of Gold" and it outlines the plight of the miners in the poorer nations who chase gold for their survival.

They risk life and limb for the precious metal and sadly many die in the pursuit of the king of metals and the freedom it might bring them. Many live shortened lives prompting some with a partial view of the whole picture to jump to some wrong conclusions.

The Governments and economies of many third world countries rely on gold as a vital component of their GDP which allows roads and other infrastructure to be built. This in turn allows crops to be bought to market that would otherwise rot when unmade roads turn into mush during the rainy season and become impassable.

The gold mining and sales activities enable the building of new facilities like hospitals and schools. Of course many of the major gold miners operate in these countries with substantial mines using the latest technologies. For example: Anglogold Ashanti in Ghana and Barrick Gold at Lagunas Norte (Peru) and elsewhere - and Newmont too plus several others.

They operate in difficult conditions and contribute to these economies also and often take excellent profits for their trouble and risk during the good times - and so they should. After all they also face extreme risk and little if any reward during the bad times in their industry.

Global Gold - Mainstream in brief

Meanwhile back at the ranch, elsewhere in richer economies there are nothing but modern mining companies and mining methods backed by world standard refineries and bullions banks that move large quantities of bullion from Seller to Buyer and back again. Conditions are still tough for the miners but nothing like life in Africa, parts of Asia or much of South America.

The first world gold trade is well covered by the World Gold Council founded in 1987. "The World Gold Council is an organisation formed and funded by the world's leading gold mining companies with the aim of stimulating and maximising the demand for, and holding of Gold."

Most physical gold and silver buyers invest in jewelry or 99.5% pure gold ingots that are stamped by a registered LBMA (London Bullion Members Association) refinery.

Much of the investment grade jewelry is 22 Carat gold and stamped by a goldsmith or jeweler - not by a LBMA registered refinery however investors still rightly consider it real wealth and a solid gold investment.

Gold is fungible meaning that gold produced in South America, Europe, Australia, USA, Switzerland or Africa is the same product - all gold is gold - simple fact.

Gold is a rare element as you all know - it is listed as the symbol Au at number 79 on the periodic table of chemical elements. Au is short for the Latin name for gold which is Aurum. It is the same element all over the world because it is a basic chemical element - cannot be broken down any further into other elements.

Interestingly enough it is the impurities that stamp gold with the location it was mined - that little 0.5% or less has a chemical signature of impurities much like a fingerprint.

The leading identity in the gold sales market is the London Bullion Market Association. It exists "to facilitate trading among London Bullion Members Association members, a list of acceptable Smelters and Assayers is maintained by the Market." This is known as The London/Zurich Good Delivery List. There are LBMA refineries throughout the world refining local gold from local mines and also re-smelting old gold for investment purposes from scrap and older bars.

GLD is short for Good London Delivery and this term relates to a set standard of gold bullion that regulates bar size, weight, acceptable Hallmarks (stamp of the refiner), serial numbers, year of manufacture and of course fineness (purity level). Even global reserve estimates are related to this system and the business done by the LBMA refineries.

So much for mainstream gold trading - I could go into swaps, paper gold and ETFs however this is outside the scope and purpose of this article which concentrates on physical gold.

The hidden side of the trade

Outside the mainstream gold scene, the GLD system, investment bars and jewelry we have wholesale gold which does sell at a discount under spot and many investors and professionals I have spoken to could not - and some still do not believe this is true. I can understand their reluctance to accept this for several reasons.

There are a large number of gold scams out there and most of them revolve around the form of dore bars and gold dust. Most countries outside the GLD system (no LBMA approved refinery within their country) tax the gold leaving their shores and there is smuggling and all sorts of corruption to avoid these taxes.

These countries do manage to collect some much needed taxation revenue from this source however this type of environment allows for abuse of the system. I am not pointing the finger of blame here it is just how it is and many nations that fit this description are doing something about reforms - step by step it is not an easy process.

What you have to understand is that dore bars are actually miners bars and are what mining companies in even modern economies actually produce. Gold miners ship their dore bars to refineries both in and outside the GLD / LBMA system depending on where they operate. Some miners ship a more crude form of gold concentrate however gold dore bars are common.

For those that have not seen gold dore here are two pictures (below left) offered as illustration. The photo on the right is a pan containing gold dust - fine particles of gold.

Dore bars contain various quantities of gold - purity levels vary considerably. Unlike GLD bullion bars or stamped 22 carat jewelry there is no standard purity. The same applies to gold dust and I have included a photo above to show what I mean by "dust." Once again there is no set standard of purity, weight or date of manufacture, no stamp and no hallmark are possible for gold dust.

The "Discount" Word

The variable nature and risk associated with the gold trade of Dore and dust outside the GLD regulated countries attracts a discount. It attracts a large amount of highly questionable activity and outright fraud as well which makes it hard for the honest miners to market their product.

There are some buying systems in place, however this trade is lightly regulated and subject to major abuse by criminals. Investors hear about discount gold and see opportunity and I strongly caution potential buyers without solid experience and "means" to go anywhere near this trade.

The main abuse, apart from outright fraud, tends to be related to gold dust because it is so easy to tamper with. Scoop out a few handfuls and throw in some sand to make up the weight difference and the crime is done - and hard to detect. I heard a story recently that one gold dust shipment assayed 40% less at the buyers end - obvious tampering.

Dore is much safer because it is semi refined and the chunks can be counted, weighed and assayed with greater certainty. It is semi refined suggesting a greater level of sophistication from the actual mine supplier. This is not raw panned alluvial gold - the supplier is more likely to be able to manage the logistics trail and ensure the true gold content is not tampered with along the way.

Once again though there is much fraud and this is not mainstream supply, so great caution is needed. In order to safely buy discount Dore bars from these countries you have to have solid intelligence on the people involved. It is important to establish that they operate a registered mine or mining tenement sometimes called a mining concession. Without this it is unlikely you can establish correct ownership or guarantee that the supply is not from criminal, money laundering activities or terrorist origins.

The reasons above are the main cause of legitimate discount gold trade - the honest legitimate operators are forced to sell their non GLD product at discount. The legitimate dore and dust is sold after assay in the country of origin and by the same methods used in first world countries - it is not rocket science.

The largest refinery in Africa is the Rand refinery (South Africa) and it is a highly regarded and tightly regulated LBMA operation. This article is a brief overview of this trade and is not the whole picture - however it is offered as a general coverage of the subject and I hope it clears up some misunderstanding on this trade.

Yes discount gold is real - it is not a myth, however buyer beware. The risk is extremely high if you are not dealing in the manner I have described above and there is nowhere near enough gold supply from this type of source to supply global investment demand. Novices blundering into some countries can lose more than money - they can lose their lives. This is a trade for the experts who are well funded - and for those who are well connected / experienced and resourced with the wherewithal to do this successfully.

Fraudsters be aware this trade is now controlled under anti-money laundering laws on a global basis. There is increasing surveillance and scrutiny world wide however this does not provide complete protection - so the above caution still applies.

Lastly - a comment on the gold price action lately. From my recent article [2 Mar 2009], Lies Exposed, Hope and Massive Change:

"Last week I penned an article in which I stated gold was about to fall and gold stocks were about to correct. The bulk of the talk then was about gold going through US$1,000 and shooting upwards. My take was that we will see perhaps a flat top triangle formation first and a good multi test of the US$1,000 ceiling for a few months. So far so good we got the reversal I expected and I look to further falls over the next week or two possibly into the $850 to $875 area."

I have not changed my view; here we are, a little slower than I thought, providing yet another lesson in patience in these markets.

I believe we will consolidate down here in this area and then head back up high enough to generate excitement once again somewhere near the $1,000 area. It remains to be seen how long it will take to break this exciting level - but I expect it will happen this year somewhere between May and November.

Neil Charnock
email: info@goldoz.com.au
website: www.goldoz.com.au

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DISCLAIMER: Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, furthermore conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

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