China: gold boom sparks wave of counterfeits

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Behind the counter of Mok Sang Kee Jewellery, a small shop in central Hong Kong, its manager is on guard against fraud.

But Mok Yeuk Ping s age-old methods of testing gold for purity may not be enough to protect him against today s swindles. As gold prices rise ever higher, touching a nominal record of $1,424.10 a troy ounce last month, the yellow metal is attracting ever more inventive fraudsters.

And Hong Kong, in its position as the back door to the booming Chinese gold market, is a prime location for gold counterfeiters. Haywood Cheung, president of the Chinese Gold & Silver Exchange Society, Hong Kong s century-old bullion exchange, said goldsmiths and jewellers in the territory had been duped into buying between 200 and 2,000 ounces of a new, hard to detect alloy passed off as bullion.

EDITOR S CHOICE
In depth: Gold - Dec-02China s gold imports surge fivefold - Dec-02HK gold market hit by sophisticated scam - Dec-02Analysis: World economy: In gold they rush - Nov-12Zoellick urges G20 to heed gold price - Nov-10China is key to next rally in gold prices - Oct-27 It s a very good fake, Mr Cheung says.

In one case, executives discovered a pure gold coating that masked a complex alloy with similar properties to gold. The fake metal included a significant amount of bullion, about 51 per cent of the total, alloyed with seven other metals: osmium, iridium, ruthenium, copper, nickel, iron, and rhodium.

The complex nature of the fakes suggest they were produced by a metalsmith with sophisticated equipment and extensive knowledge of metallurgical engineering.

Most scams involve gold-plated tungsten or a cheap gold alloy which can be easily detected.

Gold glistens

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But the latest involves pure gold plated on a complex alloy whose colour, density, and hardness bears a remarkable similarity to the real thing.

Even Luk Fook Group, one of Hong Kong s biggest jewellers, was tricked into buying $11,500 worth of fake gold this summer before putting its stores on alert. This was the biggest hit ever, said Paul Law, executive director of the firm.

The gold faking scams highlight two market trends: first, the rise in bullion prices, which has caught the attention of individual investors, and, second, booming demand in China which is on track to overtake India in the next few years as the world s largest gold consumer.

The rise of Beijing is redrawing the map for the global gold industry and increasing the importance of Hong Kong s precious metals market as a regional trading hub.

China, already the world s largest gold miner, has been forced this year to make hefty imports to satisfy local buyers. In a rare revelation, Chinese officials said on Thursday that the country has this year until October bought 209 tonnes of gold, a fivefold increase from an estimated 45 tonnes for last year.

The surge in imports come as Chinese investors, in common with gold buyers in the west, are turning to bullion to protect their wealth against fear of rising inflation and currency moves. Xin Yi Che, commodities analyst at Barclays Capital in Singapore, says that the latest data, even if incomplete because of the lack of information about gold scrap and the activities of the central bank, suggests very strong Chinese demand .

Total Chinese gold demand surged last year to nearly 450 tonnes, up from about 200 tonnes a decade ago, according to the World Gold Council, the lobby group of the mining industry. Analysts anticipate a further leap this year, putting the country within striking distance of India s total gold demand of 612 tonnes in 2009.

Walter de Wet, precious metals analyst at Standard Bank in London, says the freshly revealed import data suggest that Chinese demand could top 600 tonnes, up nearly 75 per cent from last year. The data are murky, nonetheless, and Mr de Wet warns there are probably illegal gold exports from China that are not be captured by the data. This would distort the actual gold numbers for China. However, the trend is undeniable: gold demand in China is rising rapidly, he says.

Little surprise, then, that criminals are trying to cash in. For inexperienced buyers of the precious metal in China and the rest of Asia, fakes can be extremely difficult to detect. Bashing, biting and scratching the metal provides a simple test for gold s characteristic softness, but will not catch more sophisticated counterfeits.

Gold-plated tungsten is a near-perfect fake, since tungsten has almost exactly the same density as gold.

Moreover, such products are relatively easy to obtain. China Tungsten Online, a company based in the coastal province of Fujian, says gold-plated tungsten, including coins, bars and jewellery, is one of its main products.

Our gold-plated tungsten alloy products are only for souvenir and decoration purpose, the company says on its website.

Here we declare: Please do not use our gold-plated tungsten alloy products for illegal purpose.

Yet, criminals looking to sell gold-plated tungsten as pure gold would only be able to dupe naive buyers. Tungsten is a hard, brittle grey metal.

Drilling into or slicing open a fake item would immediately expose the deception.

By contrast, the complex gold alloy that has duped jewellers in Hong Kong earlier this year is far more difficult to detect.

These items require extremely close inspection, including exposing the core to extreme temperatures and chemical analysis.

That process, known as a fire assay , is a standard part of any big gold-dealer s repertoire, meaning that fake gold that enters the gold market at street level will not be able to get past refiners or gold exchanges.

With China on track to become the biggest buyer in the gold market, Hong Kong s jewellers are likely to see ever more elaborate fakery.
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