A veritable scandal of the year has recently broken out in China. According to the local police authorities, one of the country's largest jewellery manufacturers was caught committing fraud.
For many years, the company has been taking out bank loans, while providing physical gold as collateral. Now, it's been discovered that the gold was fake: copper bars covered in gold paint. As it turns out, lenders hold a total of 18 tons of this fake collateral – an enormous figure.
How is this even possible? After all, it's easy to distinguish gold from copper by weight.
There are two primary hypotheses. The first is corruption, yet it's difficult to believe that this is the root cause, granted that such a scheme would require a lot of people to pull off.
The other version is simple carelessness. The jewellery company receives a loan and delivers gold as collateral. What does this transfer of yellow metal look like? An armoured vehicle carrying 'gold' arrives at the bank. Then, the vehicle's staff hands over the documents to the vault employees, who open the gates. The vehicle enters and unloads the gold bars. The vault staff counts them, signs off on the paper, the vehicle leaves, the bars are carried into the vault, and the employees report to the central bank office that the gold has been delivered.
Throughout this sequence, the metal bars themselves are never examined. Why? Because nobody expects fraud at this stage. And if the bank's standard procedure doesn't include an obligatory inspection, the vault employees have no reason to conduct one.
What now? It might turn out that those Chinese banks weren't the only ones to get tricked – thus, it’s possible that many other vaults, including those belonging to central banks, may contain fake gold.
What do you think? Would a vault owner acknowledge having been fooled in such a way?
Critics will probably say that the gold hasn't disappeared – it's hidden somewhere. That's right, but it won't enter the market. Thus, investors can ask: how would the gold price be impacted if half of owners decided to withdraw their holdings from vaults?
Follow us on social media: