Source: Cryptogon

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.

UPDATE 4: 19/11/2009 11:40 GMT: Where Does This Leave Us?

On the one hand, there are many market participants who are relying on London Good Delivery gold bars being real, because some amount of that gold is actually being used/consumed commercially, for non investment purposes. As Adrian Ash notes, jewelers, chip fabricators and dental suppliers buy some amount of their gold from London Good Delivery sources. (How much? He doesn’t say, and I don’t know.) Where are the lawsuits from end users who bought London Good Delivery gold and wound up with tungsten? I’m not aware of any. According to the tungsten rumors, thousands of Good Delivery bars are bogus, yet, there are no credible reports of any end user receiving a single bogus London Good Delivery gold bar. (Someone correct me if I’m wrong and I will update this ASAP.)

On the other hand, I think we have to assume that the number of bars that BullionVault is holding, that have been authoritatively assayed and unquestionably determined to be what they purport to be, is zero.

In my email to Adrian Ash and Paul Tustain, that included professor Turner’s comments, I wrote:

It boils down to a concern about how many (if any?) of the BullionVault bars have been authoritatively assayed; that is, drilled all the way through and proven to be what they purport to be.

In response, Adrian Ash, the Head of Research for BullionVault wrote (full text below), “The question of full re-assay is redundant,” because the wholesale market for gold is functioning with end users turning some amount (again, no idea how much) of the London Good Delivery gold into jewelry, electronics, dental crowns, etc.

In the final analysis, BullionVault users are relying on the integrity of the London Good Delivery system, and BullionVault’s commitment and ability to guarantee the quality of all of its clients’ gold.

I’d have to conclude that BullionVault is good enough for me, because I can’t think of a more reliable way of owning gold. Sure, gold coins are available around the world from any number of dealers. Are those coins real?

Are you sure?

UPDATE 3: 19/11/2009 11:40 GMT: Adrian Ash Responds to Professor Turner’s Comments

Hi Kevin,

Non-investment use accounts for well over three-quarters of demand each year, and a big chunk of that is met in the form of Good Delivery bars. Yet there are no reports from jewelers, chip fabricators, dental suppliers or any other end users of the bullshit currently trying to pass as “insider news” on the web.

Bottom line? Good Delivery does what it says on the tin. The wholesale market is liquid and cost-efficient precisely because it’s warranted by the chain of integrity. The question of full re-assay is redundant. And on top of that, we guarantee every gram of BullionVault gold.

Best wishes,
Adrian

—End Update—

UPDATE 2: 19/11/2009 11:20 GMT: Email from Matthew Turner, Associate Professor, Department of Physics, University of Warwick

Earlier today, I received the email below from Matthew Turner, Associate Professor, Department of Physics, University of Warwick. He has given me permission to publish this, along with his name and title. The message has been forwarded to Adrian Ash and Paul Tustain at BullionVault:

Adrian Ash at BullionVault writes, “As you may know, we send independent assayers into the vaults every year to check all the gold bars… Last year, the assayers were 100% satisfied with every bar”.

“Satisfied” – what does that mean? Did they actually properly assay any of these bars? As in “drill a hole in it and test the material thereby extracted”. What he is actually saying is that they go through the vault and check the serial numbers. From then on Mr Ash is surprisingly short on actual details in his answer to your question – a question from a concerned client. It may also be that they physically check the bar densities, by measuring the mass (on some scales) and the volume (e.g. through measuring the displaced volume of water according to Archimedes principle). At least that’s how I’d do it. We can rest easy, he says – this assay would detect the difference between Tungsten at 19.25 g/cm3 and Gold at 19.30 g/cm3. Now, call me a geek, but it took me about 30 seconds to discover that there are at least two metallic elements with densities considerably higher than Gold – Osmium and Iridium weigh in at about 22g/cm3 and can each currently be bought for about $400/ounce. Here is a recipe to consider: Melt some tungsten. Add about 2% Osmium so as to bring the room temperature density of the resulting alloy to exactly 19.30 g/cm3. Now coat it with gold to a total mass of 400 oz and stamp a serial number on it. Hey presto – an object that is indistinguishable from the equivalent gold bar, unless you melt it down or drill a hole in it. How often does that happen? Let me hypothesise that not one gold bar has ever been assayed in this way within the good delivery system. I stand hopeful of being corrected by Mr Ash here. Perhaps he has some data, such as the serial numbers of those bars properly assayed by BullionVault? Or perhaps I am just missing some important fact?

Mr Ash also made the point, “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.”

What if I’m correct and these bars are never properly assayed? They wouldn’t ever found to be bad, at least until such time as the fan blades are straining to chop a whole lot of other manure. What if it is then found to have originated from a sovereign government which is busy defaulting on all its debts?

Life is all about risk/reward. For anyone thinking of swapping good delivery bars for tungsten clones with the same markings and weight and then recycling the real gold as scrap (say) the risk of detection could be very small and the reward is currently $450,000/bar

He concludes with a disturbingly vague, “it’s unlikely (my emphasis) that any such metal could ever make it into accredited storage”. Would he care to quantify the risk associated with his phrase “unlikely”?

And how about those thousands of tons of “gold compounds” being exported from the US annually, according to the US Geological Survey report. Were they actually bars of gold? Was there a corresponding drop in gold at Fort Knox or could some Tungsten alloy bars have been used to keep the numbers up? OK, maybe that’s a bit out on the conspiratorial fringe but the whole system does look terribly opaque to a concerned client who just wants to know that the bar of gold that BullionVault is holding for him isn’t actually a tungsten brick.

So Mr Ash, what were the serial numbers of those bars that you drilled holes in, again?

—End Update—

UPDATE 1: 19/11/2009 02:20 GMT: This morning, I received an email, from a professor of physics at a British University, that was a response to Adrian Ash’s comments (below). I have asked the professor’s permission to post his name along with his message.

I have also forwarded the material to Adrian Ash and Paul Tustain at BullionVault.

—End Update—

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
http://www.albertgoodman.co.uk/bullionvault/

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:
http://bullionvault.com/help/terms_and_conditions.html#Warranted%20gold%20content

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:
http://www.lbma.org.uk/delivery

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

–
Adrian Ash
Head of Research
BullionVault.com