Chinese Gold Fraud Scandal plays to the tune of almost US$3 billion

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You can expect high standards of legitimacy and safety when trading gold in Australia.

However, what happens when the gold is fraudulent gold-plated tungsten or copper? What happens when 83 tons of gold bullions bars, valued at 20 billion yuan are in fact found to be gold plated decoys?

This happened recently, in China, in what may very well be the largest gold counterfeiting scandals of recent history. In the Wuhan province, rumblings began in February 2020 as the fraud began to unravel. In July the discovery sent shockwaves through the Chinese economy.

Kingold is the company at the centre of the controversy. They are largely privately owned, with shares on the Nasdaq stock exchange in New York.

In a practice known as ‘ghost collateral’ chairman Jia Zhihong, used gold plated copper bars as collateral in securing tens of billions in funds from up to 14 investors. Over five years Kingold used the bogus gold bars as security against $US 2.8 billion in loans.

The company claims to have secured the loans to supplement its cash holdings, support business operations and expand gold reserves. It also used their cash fluidity to pledge 7 billion yuan to buy state owned auto parts maker Tri-Ring Group.

The company cash flow after the release of the funds benefited not only Kingold, and their stockholders, but the broader Chinese economy. A significant contributor in China’s economic boom appears to have been accredited to tens of billions in hard assets, gold, that doesn’t in fact exist.

The fraud went unchecked for years. 83 tonnes of the gold-plated copper bars were used by Kingold as loan collateral, leaving lenders with 16 million yuan in unsecured and unpaid loans. What is most staggering is that not one of Kingold’s 14 lenders made moves to check the authenticity of the collateral until Kingold began defaulting on their obligations.

The gold fraud came to light when Dongguan Trust, a Chinese shadow bank, attempted to liquidate Kingold’s collateral over defaulted loans.

The news of the bogus bars triggered urgent reactions from Kingold’s other creditors. China Minsheng Trust is one of Kingold’s largest creditors. Under court order, Kingold was required to allow the testing of China Minsheng’s Trust’s collateral gold. The results showed that the Trust was also an owner of gold-plated copper bars, leaving them standing with billions in unpaid and unsecured debt.

With Kingold under investigation for the fraud, their chairman Jai Zhihong is flatly refusing there is anything fraudulent about his dealings. He states that some of the company’s earlier gold acquisitions had low purity.

This scandal is not insignificant; the 83 tons of bogus gold is equivalent to 22% of China’s annual gold production and 4.2% of the state gold reserve of 2019. Kingold has been expelled as a member of The Shanghai Gold Exchange, a gold industry self-regulatory body.

A scandal such as that playing out in Wuhan is not likely to occur on Australian shores. The Australian Gold Industry is a highly regulated industry. Gold comes under similar scrutiny to that of banks. Metal purity, weighing, valuation, sale and the secure and auditable storage of gold, all come under strict legal regulations. Deviances from regulation are punishable by law with heavy financial and judicial implications.

So, while it is unlikely that a fraud of this type and magnitude would hit the Australian gold market, it is a cautionary tale. The Wuhan gold scandal reminds us to deal with only reputable players in the gold market and it reminds us to ensure the auditing process of those we trust with our physical gold is sound.

In addition to strict Australian standards, physical gold within the Meld supply chain is independently audited every month. We are highly experienced experts in the gold industry and our rigorous physical gold audits are carried out by some of the most skilled valuers.

Meld is delivering a software driven solution to gold security, ensuring the highest standards of trust and transparency while aiming to stamp out any possibility of fraud.

Disclaimer: This material is researched market commentary and not trade recommendations. We source our information from respected industry publications and announcements that we deem reliable. This is general information and may not relate to your unique circumstances. Market performance and futures are discussed as observations and predictions and are not indicative of future performance. This article is not investment advice, please seek independent financial advice from a financial professional. Meld is not a financial advisor.