Wednesday, August 18, 2010

Tons of gold imports turn to dust on arrival: WHAT CAN WE DO???

Another case for keeping your bullion within the "Chain of Integrity" - Allocated, private gold bullion ownership.


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 pi-rates, 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 them-selves.


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 com-pared to whether or not it contained the correct amount of metal, i.e., correct weight and fineness (purity).

Unlike Silver, Gold is denser than al-most 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.


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.


Everyone needs to realize that Gold must go through the refiners 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.


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 totaling at cur-rent 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.


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


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, an-other 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.


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 be-coming less valuable or worthless, this puts the Gold in storage under consider-able risk in the case of a write down of the bank's assets, or worse, collapse through bankruptcy.


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.


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 re-move their Gold and Silver holdings outside of the system not realizing that they have broken the LBMA chain of integrity.

Until next time,

Simon Heapes, Treasury Secretary
Anglo Far East Bullion and YOUnique


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