A close up of a magnifying glass rests on top of a bar graph that shows declining sales or performance over a quarterly basis. The image is photographed using a very shallow depth of field.

A new scandal involving fake gold bars has emerged in China. This one is not a matter of fake investor bars or coins. This one is big, involving fake gold bars that have been held as collateral against a multi-billion dollar corporate loan for at least five years.

On May 22, it was revealed that a Chinese company, Kingold Jewellery (NASDAQ:KGII), had pledged gold as collateral with 14 Chinese financial institutions for loans of RMB 20 billion (around US$2.8 billion) in China at least five years ago. The gold was stored in various gold depositories around China. Kingold ran into some financial difficulties in late 2019, which led one of the lenders to claim some of the gold. The gold was revealed in May to include 83 metric tonnes (2.7 million ounces) of gold-clad copper, fake bars.

At this point, it is not clear who perpetrated the forgery. Kingold may well be a victim. Details are scarce.

READ: Goldex set to revolutionise the gold trading market

In order to get some insight, Proactive contacted Jeffrey Christian, CEO of CPM Group, a Precious Metal Advisory company with clients ranging from mining companies, governments, banks, coin makers, refiners and other downstream users. CPM has been covering this market for several decades and has long-established links to several sources in China.

The discussion with Christian, was not just interesting, it was illuminating. The history of gold is a history full of fakes, going back at least to the Roman times. In the past few years, the gold coin and bar markets in North America, Europe, and the rest of the world have been overrun with fake bars and coins, many of them coming from China. The coin industry has fought this while also trying to keep the extent of the fake coins quiet in order to not drive even more investors away from a market that until the past few months has suffered from a severe reduction in buyer interest.

Unfortunately, the use of fake receipts for gold and other goods, including steel, as “ghost collateral” for loans is not unheard of, in China and around the world, according to Christian. There is a quasi-racist impulse on the part of many to say such practices are common in China, but the reality is that these are universal scams. In fact, CPM itself has been approached by three separate firms with clearly fictitious Saudi light crude this week alone, and none of them were Chinese.

One of the key issues is that the 14 financial institutions apparently never sent any experts to examine the gold, either at the inception of the loans or at any point over the five or more years during which this fake gold was being stored as collateral. Again, some observers were quick to say things about sloppy Chinese oversight, but CPM has seen gold and other metals go uninspected by some of the largest and most prominent North American and European bullion banks.

“We have anecdotes going back to the 1980s,” says Jeff Christian.

The problem is not Chinese. It is universal and it is widespread. Lenders often try to keep such issues quiet when they are discovered, Christian explained. As a result, many market participants seem unaware of these risks when they store, move, lend, or simply hold gold or other metals on an unallocated basis.

Again, he opined, “one of the most interesting aspects of the scandal in the eyes of CPM is how the gold was accepted five years ago without audits, weighing, or even simple tests.” 

Another interesting aspect is that Kingold could secure some $2 billion worth loans when its market capitalisation is just $6 million. Clearly, the gold was its asset, its value, but if it owned the gold, the value of this gold should have been reported in its financial statements and reflected at least to some extent in its market capitalization. The discrepancy between the value of the gold held as collateral and the valuation given by the market to Kingold needs explaining. The disconnect should have prompted an investigation, perhaps before all hell broke loose.