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Nestor Castillero
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Mr. Castillero is responsible for execution of trades and meeting all governance, regulatory, and reporting requirements for Physical Gold Fund SP, as well as overall daily operations. He is also in charge of marketing the fund and client meetings on behalf of the company. Prior to Physical Gold... More
My company:
Physical Hard Assets Fund SPC
  • What Is The Chain Of Integrity? 0 comments
    Aug 1, 2013 9:54 AM

    It is critically important that investments in gold meet global standards. Procedures that begin with the purchase of a gold bar from a certified party and carry through to a secure vaulting location should comply with the Good Delivery Rules established in the industry.

    Assumption can become a problem! It's best to know the rules of the game before playing. There are many factors to consider when investing in gold (and silver as well). The chain of integrity is one of the most important.

    When this phrase "chain of integrity" is used in the gold market, the main concern refers to how the gold bullion has been handled. Once the gold bar has been assayed and the weight and purity has been accepted by the industry, it's considered a Good Delivery Bar if the bullion stays within the London Bullion Market Association (LBMA) certified members. If the gold never leaves a certified location, it does not need to be re-assayed and can be easily traded and exchanged within the chain of integrity participants.

    When dealing with physical gold bullion, the LBMA set the standards of integrity. The chain of integrity consists of trust among the different parties, i.e., accepting and honoring gold that comes from another member. For example, in COMEX future contracts, you can find the specific rules that apply to its chain of integrity.

    When buying or selling bullion through members of a chain, the face value of the investment will be accepted without having to assay the bar or recertify. If the gold leaves this chain and falls into the hands of a non-certified member, the chain has been broken. The only way to return the gold to the chain is for a certified refinery to re-assay the bar and put it back into the system.

    As long as bullion remains within a chain of integrity, it can be easily sold and liquidated for a cash position. Once the bullion leaves a chain, selling the position can become a bit trickier than you may think.

    Dealing with gold bullion outside of a chain of integrity can turn into an unexpected problem. A prime example comes from 2010 when the United Arab Emirates imported several tons of gold that turned into dust upon arrival. Traders in the UAE had purchased discount gold from Africa, which didn't come from an LBMA certified member, and it was all fake. The estimated loss was approximately 200 million dollars. If this purchase would have been done through an LBMA member, the bullion would have met Good Delivery standards and quality certifications.

    When purchasing gold, it's advisable to consider both entry and exit. Don't assume that selling will be as easy as buying, and always have in mind the chain of integrity.

    Themes: Gold, Finance
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