All That Glitters Isn't Gold--Watch Out for the Fake Stuff

Doug Hornig, the editor of Big Gold sent me a piece Saturday that should make all those who might be considering buying some gold (or silver for that matter) sit up and take notice.

This might also be one of the reasons many feel it is safer to diversify by not only holding some carefully chosen "physical assets" but also some reputable fund like The Central Fund of Canada (NYSE:CEF), ASA Limited (NYSE:ASA) and the Market Vectors Gold Miners ETF (NYSE:GDX) which moved up another 6% on Friday.

You probably remember movies about the Old West, wherein a shady-looking character would offer to exchange a gold coin for a horse, and the seller would bite down on the coin to verify its authenticity. That was about all you could do if you lacked proper assaying equipment and had to make a snap judgment: depend on your teeth to tell you whether the metal in your hand was sufficiently soft to be genuine gold.

The bite test is actually a pretty good one since gold, despite being among the heaviest metals, is also very soft. If you chomp down and shatter a tooth, it ain’t gold. But before you go munching on your coin collection, you might want to ask yourself, why bother?

Well, because of the Internet. While the Net has become an indispensable resource and we’d never want to return to the days when basic research meant a long day in the library, it also has the ability to stir up a hornet’s nest of concern at the drop of a stick.

One such hornet release followed the recent publication of a three-part series by Coin World, dealing with the subject of coin counterfeiting in China, where it’s quasi-legal. Instantly, the Web was buzzing with the worries of bloggers and eBay shoppers, and the pontifications of pundits about this dire threat.

Before we got too worked up about it, first thing we did was carefully read the source material. Yes, the Coin World articles raise the issue, and they feature an in-depth interview with one Chinese counterfeiter, although that’s not what he calls himself. He’s a proud artisan who produces replicas.

Of what? As it turns out, it’s primarily copies of ancient Chinese coins, which are sold to tourists. A few fake U.S. silver dollars are put up each week on eBay (EBAY), but they are required to carry a Replica stamp.

Do all Chinese counterfeiters abide by this regulation? Perhaps not. But eBay has always been a place where caveat emptor rules, so the best policy would probably be simply to avoid coin purchases from China.

Problem Areas

Next, we consulted with our favorite dealer, asking if they come across many fake bullion coins, such as Eagles or Maple Leafs. The answer was no. They’ve only seen a handful during their thirty years in business.

Not that it’s hard to do. With modern 3-D laser imaging, a die can be created that mimics the real thing in perfect detail. The good news is that it’s impractical. The difficulty is that any counterfeit bullion coin would likely have to be gold in order to pass. If it were pure, then the profit margin would be too small to make the deal worthwhile. And if the counterfeiter skimped on the gold content, the coin’s weight would be a dead giveaway.

The only alternative would be to gold-plate a coin made out of some other metal. But again, getting the weight right while preserving the correct size would be a challenge.

Which brings us to the areas where counterfeiting can be a real problem. The most significant is rare coins. These can be made with the proper gold (or silver) content, then artificially aged so that only an experienced numismatist could pick them out. Because of the premium they command, rare coins made with real gold would be highly profitable where a bullion coin would not.

This is one of the reasons (disinterested grading is the other) why many collectors will only trade coins graded and slabbed by third-party specialists like Professional Coin Grading Service (PCGS) or Numismatic Guaranty Corp. (NGC).

Ominously, though, some counterfeit coins are turning up inside phony slabs. If you collect rare coins and have any reason to suspect them, it’s pretty easy to sort the real slabs from the fakes. Coin World provides illustrations on just how to do that here. (http://www.coinworldonline.com/articles/ChineseCounterfeit/Diags.aspx)

Gold bars are a different matter. Fakes do show up in the market from time to time, and they’re hard to identify. Generally speaking, counterfeiters don’t bother with the smaller ones, which are stamped, numbered, and sealed. They concentrate, our dealers tell us, on 1-kilogram or larger sizes. These are poured, rather than stamped, and can be easily adulterated or even hollowed out and filled with lead or some other metal. Compounding the problem is a lack of standard weights, even among good delivery gold bars. The “400-ounce” bar, for example, can vary anywhere from 390 ounces to 420.

How to Protect Yourself

As noted, we don’t believe that there is a serious issue with counterfeit bullion coins at the moment. But that doesn’t mean that they don’t exist, nor does it mean that evolving technology might not make them more profitable in the future than they are now.

The best precaution is the simplest: deal with someone you trust. Establish a relationship with a coin dealer who has built a strong reputation, preferably over a matter of decades, such as the dealers we recommend in BIG GOLD. Buy from them, even if you stumble across some mail order supplier who is charging less of a premium.

For small bars, purchase only those that carry the stamp of one of the known, trustworthy refiners, such as PAMP, Credit Suisse, or Johnson Matthey. For bigger orders, ask your dealer if they do assays. Reputable outfits generally assay bars that are a kilogram or larger. If you want a 100-ounce bar, consider buying direct from the Comex, which will also vault it for you. That removes the assay requirement when you buy, but remember that if you take physical delivery of a large bar, you’ll need an assay when you sell. Do not, under any circumstances, buy a larger gold bar on the Internet or from a private seller you don’t personally know.

If you’re still worried about a coin, there are tests you can perform to check it out. You can get more details here.

Scroll down a little to see the article which has the "tests" mentioned down towards the bottom.

This has been one heck of a positive week for gold and silver. Just like a stock or fund, we investors should be very careful about what kind of physical assets we are buying and from which dealer we buy. Get a good referral, check the internet about a dealers' or products' reputation, and consider subscribing to a respected newsletter on the topic.

Disclosure: Author owns CEF and ASA in his own accounts

Comments

[User 573348]

See our article on Applied DNA ($APDN) - Diversification through client acquisition which documents the company's work in stopping counterfeiting of goods at:

http://bit.ly/nJfVks

[Sesquiculus]

While lead is significantly lighter than gold, its density is similar to both silver and palladium. Allegedly, back when silver had its last run-up, scammers would drill out 100 oz bars and refil the holes with lead. Then they would cap the hole with silver and polish the area.

My bullion dealer tells me that most of these were easy to detect if you looked closely. The scam ended when gold went below $10 per ounce.

[copesetic]

There are LOTS of fake silver coins that ARE magnetic,dude
and I wasn't talking about a lighter,geez,please engage brain and read before touching the keyboard.

On Apr 27 02:58 PM ricardoRI wrote:

> Only nickel and iron are magnetic, so lack of magnetism proves nothing.
> Lead, the cheapest (and somewhat close) fake gold, is not magnetic
> and is soft. None of the metals used for fake precious metals (nor
> the precious metals themselves) will melt or deform with the heat
> from a butane lighter.
>
> One can get an acid test kit which will give the gold purity. Or,
> if you are careful, a drop of nitric and sulfuric acids will attack
> fakes, but not fine gold. X-ray fluorescence is easy and non-destructive,
> even testing adulterated materials.

[Marc Courtenay]

Thanks for your comments. I can't stress enough that before you buy the physical coins or bars that you make sure you are dealing with a reputable dealer that you've checked out carefully.

[Rick Krementz]

Only nickel and iron are magnetic, so lack of magnetism proves nothing. Lead, the cheapest (and somewhat close) fake gold, is not magnetic and is soft. None of the metals used for fake precious metals (nor the precious metals themselves) will melt or deform with the heat from a butane lighter.

One can get an acid test kit which will give the gold purity. Or, if you are careful, a drop of nitric and sulfuric acids will attack fakes, but not fine gold. X-ray fluorescence is easy and non-destructive, even testing adulterated materials.

On Apr 27 11:27 AM copesetic wrote:

> A magnet is handy,nothing precious will stick to a magnet.And for
> silver,if you don't might marring it,a butane blowtorch,if you can
> start to melt it,not to precious.

[copesetic]

A magnet is handy,nothing precious will stick to a magnet.And for silver,if you don't might marring it,a butane blowtorch,if you can start to melt it,not to precious.

[Avoiding Alpha]

a quick and easy test for your gold coins? I am amazed there arent more "gold bugs" and advocates mentioning this tool more

May I recommend for all coin buyers the fisch instrument (fisch.co.za/). It’s a full proof mechanism to check the authenticity of the coin(s) in question. I just received my order from kitco today and ran them through the Fisch. I feel much better knowing I own actual bullion. I searched long and hard to find a “fake gold coin detector” on the internet and I can attest to its accuracy.