Blood Gold

Posted On Sep 6, 2019 By Emily Clancy

  • Business as usual: Counterfeit gold
  • Jim Rickards on the seedy world of underground gold
  • China’s the perpetrator? 
  • Prism 2019… jobs, markets and the Fed
  • 5G wave puts internet underwater (literally)
  • Alan Knuckman’s leader of the submarine pack
  • And a longtime reader’s “wow” moment

“There's nothing new about counterfeit gold,” says Jim Rickards.

The typical method used by swindlers, fraudsters and mountebanks worldwide is to coat a tungsten bar or round with gold, add the appropriate markings and — voila! — it’s virtually indistinguishable from the real deal.

[In fact, The 5 reported the story of counterfeit gold in the vaults of the Royal Bank of Canada in November 2017. Again, the “gold” bar and its package were marked with the insignia of the Royal Canadian Mint (RCM).

Royal Bank of Canada

The RCM was appalled, calling the fake a one-off: "Counterfeiting of Royal Canadian Mint products is extremely rare and this is an isolated case,” the bank said at the time. 

Really, though? We found a “Canadian Gold Bar 1 OZ. .9999 Premium Gold” bearing the RCM’s stamp on website Wish.com. The cost? Thirteen dollars plus shipping and handling.]

Counterfeiting’s no sweat considering tungsten weighs almost the same as gold: 19.250 grams per cubic centimeter versus 19.284 grams per cubic centimeter.

“There are ways to detect these counterfeits that involve highly precise scales, drilling through the core, magnetic scales, a ‘ping’ test (judging by the sound) and other methods,” says Jim. The downside, however, is gold bullion can be damaged in the process, reducing its resale value. 

Jim says: “Now comes a new kind of counterfeit.” But it’s actually pure gold…

“Gold bars fraudulently stamped with the logos of major refineries are being inserted into the global market to launder smuggled or illegal gold,” says an article at Reuters.

And if you thought tungsten masquerading as gold was difficult to detect, how about mismarked — but real — gold?

“In the last three years,” Reuters says, “bars worth at least $50 million stamped with Swiss refinery logos… have been identified by all four of Switzerland’s leading gold refiners and found in the vaults of JPMorgan Chase & Co., one of the major banks at the heart of the market in bullion.”

In fact, according to Reuters, four gold refinery execs say about 1,000 such standard-size kilobars have been discovered — a tiny fraction of industry output, to be sure, that produces roughly 2–2.5 million kilobars per year. Still, the fakes are highly advanced so thousands more might be in circulation and undetected.

So why forge insignias on real gold?

“Fake-branded bars are a relatively new way to flout global measures to block conflict minerals and prevent money-laundering,” Reuters says.

While you might be familiar with blood diamonds — diamonds mined in global conflict zones and sold for the benefit of narcos, warlords or dictators… the same can be true for gold. Even uglier, these mining operations often use slave labor.  

“By pirating Swiss and other major brands, metal that has been mined or processed in places that would not otherwise be legal or acceptable in the West – for example in parts of Africa, Venezuela or North Korea – can be injected into the market, channeling funds to criminals or regimes that are sanctioned.”

And the plot thickens…

“It is not clear who is making the bars found so far, but executives and bankers… think most originate in China, the world’s largest gold producer and importer,” says Reuters.

Once these gold knockoffs are sold to dealers in Hong Kong, Thailand and Japan, they enter the mainstream supply chain.

Speaking of going mainstream, the rumor mill started to churn in 2017 that J.P. Morgan had turned up at least two fake kilobars in its vaults. And get this: The fakes were only identified when it was discovered two bars had matching serial numbers.

Counterfeiters got sloppy? And J.P. Morgan likewise?

The megabank’s declined to comment beyond this: “It’s our standard practice to immediately alert the appropriate authorities and refineries should we discover mismarked gold kilobars during routine checks and procedures.

“Fortunately, we have yet to have an incident resulting in a loss to the firm or a client.”

So there!

Back to China, the Shanghai Gold Exchange — that manages the superpower’s gold market — pleads ignorance when it comes to the manufacture and transport of new gold counterfeits.

In a statement, the regulator says: “The Shanghai Gold Exchange has established a thorough delivery and storage system. The process for gold (material) to enter the warehouse is strictly managed and in compliance with the regulations.”

Meanwhile, Swiss customs reported 655 forged bars in 2017 and 2018.

Jim’s not buying it: “These pure-gold counterfeits are made in refineries in China but are stamped with the name and logo of more prestigious refineries in Switzerland such as PAMP, Argor-Heraeus, Metalor or Valcambi.

“The purpose of such counterfeiting is not to fake the gold,” he continues, “but rather to hide the provenance.

“Major refiners are committed to using gold only from conflict-free zones and not from mines where slave labor or harsh working conditions are found.

“The Chinese refiners don't care,” says Jim. “They buy gold from the least reputable sources and then try to hide the source by faking the refinery name on the bar.”

Jim’s advice? When it comes to gold bullion: “Restrict your purchases to the actual top refineries or to highly reputable dealers and mints. In all other cases, it's caveat emptor.”

[Ed. note: In August, rock star fund manager Mark Mobius went on record about gold, saying: “Gold’s long-term prospect is up, up and up… I think you have to be buying at any level, frankly.”

And if you want to buy the real metal as opposed to a gold ETF or mining stock, you face a plethora of choices.

While we’re admittedly biased, we love the Hard Assets Alliance. It allows you to buy and take delivery with exceptionally low costs.

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Full disclosure: Agora Financial was an original member of the Hard Assets Alliance a few years back and more recently purchased a stake in the company itself. That’s a reflection of how impressed we are by what Hard Assets Alliance can do for everyday folks who want safe exposure to precious metals.]

Trade war talks are back on? At least, that was the word yesterday. And the Dow rallied 370 points…

Today? The Dow’s up 70 points to 26,802 while the S&P 500 is up five points to 2,980. The tech-heavy Nasdaq — 120 points above 8,000.

Looking at commodities, oil’s down 30 cents per barrel to $56. Gold’s added $4.40 to its price of $1,529.90 per ounce.

And bitcoin… up $282.75 to $10,870.54.

Of course, the big economic number today is the August employment report…

  • Nonfarm payrolls increased by 130,000 last month, falling short of Wall Street’s estimate of 150,000 (Keep in mind, it takes that latter figure just to keep up with population growth)
  • U-3 unemployment rate steady at 3.7%
  • Wage growth better than expected with earnings increasing by 0.4% for the month and 3.2% for the year
  • ShadowStats’ unemployment rate is 21.2%, in line with stats over the last 6 months.

Looking at the headlines today, financial pundits are taking the meh-news-is-OK-news approach when it comes to the August jobs report. The market certainly isn’t juddering as a result.

We’ll see if things remain as composed for the remainder of the day — particularly in light of Fed rate cuts (Powell speaks at the time of writing. A brief bit on that below.)

Will the market surge because suddenly a half-percent cut’s in play? Or will it tank because the jobs report is further confirmation the economy’s slowing down?

That’s the prism through which we look in 2019…

Alan Knuckman — our eyes and ears at the CBOE — says: “Well over 99% of all data traffic running between the continents of the world goes through fiber-optic cables on the bottom of the ocean like this…

Sydney, Austrailia

A deep-sea view of Sydney

And Alan says the 5G revolution won’t change that. “The problem is that the cables can only handle so much traffic,” he says. The 700,000 miles of submarine cables around the globe are simply inadequate. 

“And all of the data will end up in data centers, facilities filled with electronic storage equipment.” Data storage ain’t cheap, requiring massive quantities of electricity to keep hardware at Goldilocks temperatures.

That’s why more companies are opting to build data centers in countries where electricity’s plentiful and cheap. “Google, Facebook and Amazon just announced that they're building out new data centers in Sweden, for instance.

“Of course, these data centers need to connect with the data centers here in the States,” says Alan. “And that's where submarine networks come in.

“According to TeleGeography,” he continues, “a leading authority on the international telecommunications market, the demand for submarine networks is going to compound at 40% annually.

“In other words, the 5G wave is going to double the demand for submarine networks about every year and a half.

“With the need for so many new connections,” Alan says, “it's an incredible opportunity for the company that leads the pack in building submarine cable networks.”

One such company is Ciena Corp. (CIEN) that “partners with 85% of the world's largest service providers for their fiber-optic and underwater internet network needs.” Big telecoms like AT&T, T-Mobile, Ericsson, Verizon… and many more.

Ciena doesn’t just lay cable on the ocean floor; the company’s a one-stop shop for telecoms: “It's the only vendor that addresses the systems, services, software and components… [for the] industry.”

And the 5G transition’s kicking Ciena’s profitability into high gear…

  • In 2016, before 5G, Ciena netted $125 million
  • In 2017, when companies started shifting to next-generation wireless, Ciena made $1.6 billion.

That’s a mind-blowing increase of 1,171% in just one year…

“That kind of earnings growth hasn't gone unnoticed,” says Alan, “In the last 21 months, Ciena's stock has climbed 112.09%.

“Remember, the demand for undersea cables alone is expected to increase by 40% a year for the foreseeable future. And Ciena's products can be found in 85% of the market.

“Based on Ciena's expected cash flow, my calculations put the shares at $66.65,” says Alan. This morning, shares are priced at $39.65, setting you up for a gain over 60%.

Alan’s take: “Buy Ciena before all the quick 5G gains get squeezed out.”

“Readers’ input provided a few ‘wow’ moments in [yesterday’s] edition of The 5,” says a longtime contributor:

“‘Banks pay interest commensurate with what they can charge borrowers. No stealing involved.’ Really? That may be true in good circumstances. But when the banksters have been too profligate for their own good, they find all kinds of ways to default on their debts — including using negative interest rates.

“‘Socialists ought to welcome the ability for workers to acquire the means of production [and] become part owners of the businesses they labor in.’ That would be news to all the citizens of socialist countries who have been impoverished, imprisoned or murdered because they owned a little too much of the means of production.

“‘Remember that the federal government, as well as the state governments, the counties, the cities and all the overleveraged businesses would all quickly go bankrupt if the interest rates on their trillions of debt were much over 1%.’ Isn’t it nice of them to make this our problem? All debts are repaid — either by the debtor, the creditor or the taxpayer. History shows that ‘we the people’ are the ultimate backstop (read: unsecured creditor).

“The body count involved in learning these lessons is astonishing.

“As you correctly pointed out, one downside to ultra-low interest rates is lower returns on government pension funds. And indeed there is a bigger issue: Interest rates are the most important signals in a market economy. They are the price of money. Unelected swamp critters have no business manipulating them.

“Of all the realms a quasi-government agency shouldn’t touch, it seems to me these are at the top of the list.”

The 5: Oh, “unelected swamp critters” — as you call them — won’t be content to look but don’t touch…

We had to chuckle at Econoday’s calendar today. On the itinerary at 12:30? This breathless note: “Jerome Powell speaks.”

Best regards,

Emily Clancy
The 5 Min. Forecast

P.S. If you’re a newbie to precious metals — or if you’ve tried online dealers in the past and you’ve been put off by the complexity — there’s no easier way to buy and hold real physical metal than Hard Assets Alliance.

If you prefer, with a single click you can buy and store your metal in your choice of seven audited vaults worldwide.

You can follow this link to set up an account. But there’s no need to put money in the account if you’re not ready yet; regardless, we’ll send you six free bonus reports — including Jim Rickards’ Perfect Gold Portfolio.

Yes, Agora Financial recently purchased a stake in Hard Assets Alliance, so we’ll get a cut of the fees (which are among the industry’s lowest). We wouldn’t have made the investment, however, if we weren’t enormously impressed. One more time, here’s the link.


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