Inept Sovereign Fund or Gold Scam?

Does anyone know anyone who has 10 tonnes of gold to sell at 6-10% under spot?

In a previous email, I said that my mom handles the small orders, under 100 oz. of silver, and we handle the major bullion trades.
My Mom’s Silver Shop February 22nd, 2010

After that, I was contacted by three people who were inquiring about potentially large orders. The largest group, a man claiming to represent a sovereign wealth fund, wanted to buy a minimum of up to 10 tonnes of gold, and had $20 billion in cash set aside to buy $20 billion of gold.  Wow!  I know major gold sellers, so that’s quite a potential opportunity!  At today’s prices, 10 tonnes x 32,151 oz./tonne = 321,510 oz. x $1119.30/oz. = $359,866,143, that’s about $360 million dollars.  But, the buyers would entertain smaller orders, if more gold would be forthcoming.  Even better!

In years past, I’ve discerned that such offers, both to buy or sell, are a scam because they want a letter of intent, and a letter of credit.  I’ve since learned that a letter of credit basically gives your “partner” access to all the money up front, hence the scam.  This did not seem like a scam, as that is not what was requested. But there is another reason I suspect that this was a scam.  Trouble is that they want the name of the source of the seller, which never happens; that’s why there are brokers, to hide the sources and keep them anonymous.  Also, a broker goes out of business if he reveals his supplier, because then there is no need to deal with the broker anymore!

But further, they wanted only LBMA gold.  Well, all the LBMA refiners and banks are already on well published lists, you can find them all here:

  1. LBMA refiners and banks
  2. Good Delivery List of Acceptable Refiners, Gold List, Silver List
  3. Market-Making Members
  4. Full Members
  5. Associates

So, then why would they need me or anyone else to act as a broker?

The 10 tonne amount is weird.  That should be a maximum, not a minimum.  The world’s gold output averages to about 10 tonnes per day.  The world’s mines produce about 2500 tonnes of gold per year, and there are about 250 business days per year, (5 x 52) (minus 10 holidays).  2500 / 250 = 10 tonnes! What this says is that this buyer wants to buy 100% of all the gold produced by all the world in a year.  Or, they want to buy 100% of all the world’s gold for at least an entire quarter, with their $20 billion or more.  Clearly, no buyer is doing that in the marketplace, because if they did, then the gold price would exceed $5000/oz., or maybe even $30,000/oz.!

Thus, it smells like a scam, because the numbers are just wrong. But interestingly, China has announced that they want to buy about $80 billion of gold, which, at $1000/oz., is 80 million oz., which, at 32,151 oz. per metric tonne, is 2488 tonnes.  That would work out to about 10 tonnes per day, of course.  And China, with over $2 trillion of foreign exchange, could buy a lot more, of course, if only it can be found. Is this a legit offer from China?  Or is it a bogus offer, posing as if they could be China?

Another sign it’s bogus is that they claim to be the largest current buyer in the marketplace.  Well, that’s India, not China. China announced that they have managed to accumulate only about 500 tonnes over the last 5 years, or only about 100 tonnes per year, far less than the apparent goals.  I have no idea if the sovereign wealth fund is China.  Maybe it is, and maybe it isn’t, but that’s not the point. The point is that it appears to me as if this sovereign wealth fund, if real, is going about the attempt to accumulate gold entirely the wrong way.

How? They did not include a price in the terms of their offer!

Who would be motivated to sell gold to an anonymous source at an unknown price?  What kind of buy offer, or bid, is it if the price is unknown?  There’s almost no need to respond.  I did respond, for fun, and just to get the term sheet, but again, no price.   It appears as if they want to buy at a discount to London afternoon price fix.  Discount?  How? Term sheet. This is the most professional looking term sheet for this kind of offer that I’ve ever seen, and it still reeks of a scam.  It’s kind of funny.

Price is everything.

India manages to accumulate up to 800 tonnes of gold per year, but that’s because the price of gold in India is always quoted at a premium, that means India pays higher, than western prices, plus the import duty or tax.  I hear from large bullion traders that they can get about 2% above spot in Europe, and less in the USA.  What I hear makes sense to me, because the USA does not buy nearly as much gold, hence the lower prices here.

We buy gold under spot all day long, if, and only if, people who are selling scrap gold walk in the door.  We don’t get to choose the amount that comes in, and we only get about a mere 30 ounces per month or so of scrap gold.  We get more gold in the form of coins, and we are paying higher for that, about 1-3% under spot for popular gold coins such as American Eagles, Philharmonics, Maples, Krugerrands, etc., but again, we don’t get to choose the amount, and it’s never more than about $250,000 of gold coin in a month at those prices in our area. Thus, offers to buy gold at 5-8% under spot, at 10 tonnes or more minimum, are clearly scams.

We are hesitant to pay more than the largest most reliable refiners in the USA, but we do for premium coins. There are reliable refiners who will pay up to 1.5% under spot, or 2% under spot, but only to dealers who have a regular supply.  Therefore, any “major” offer to buy gold at a significant discount under that, is clearly not real.  Nobody would sell for less to an anonymous buyer when they can sell for more to known public refiners!

Thus, it seems to me that if a sovereign wealth fund wants to buy gold at significant discounts to spot, in this market, they are dreaming.  It’s just not going to happen.  That’s my opinion, and I could be wrong, but it seems to me that China has also announced that they like to buy gold on the dips, and at under spot, and it seems to me like they are not really meeting their goals, because they don’t understand how price functions as a means to communicate intent to the broader market.

Price is everything in capitalism and free market theory!  Price is the ultimate means of communication to markets; it’s far more important than “who you know,” or a bunch of bogus terms.  But what is interesting is that it appears to me that the main way the Chinese do business is through the “who you know” theory of business, rather than through the capitalistic method, which is by price.

How can a buyer communicate intent without mentioning price?

(As an aside, I’m glad for the profile on me in my local paper, but that’s not the important thing you need to know to do business with us, you need to know the prices, which is why our price board is up front at www.silverstockreport.com and www.jhmint.com.) If anyone wants a continuous supply of gold to come their way, they merely need to offer more for gold, a higher price, than anyone else.  Then, gold will easily flow their way.  Similarly, if any of our customers want gold to flow their way, they need to pay over the spot gold price, plus manufacturing costs, plus our replacement costs to get it, that means they must be willing to pay about 6-10% over spot for manufactured gold coins.

This is why I don’t believe recent internet rumors that large futures contract buyers refused a “cash settlement” of 25% over spot to cash out their gold futures contracts.  Any such buyer could take the 25% premium, and take the cash, and then start cleaning out up to 20 of the USA’s largest major gold dealers, placing many multi million dollar orders with each of them, and get far more gold for far less. Business is really rather simple, and it seems that this sovereign wealth fund does not understand basic business.  (And I’d expect that from a government agency, too.)  If they want gold to flow their way, they have to offer better terms than the competition.  Why would anyone sell gold to an anonymous source, for less than they can get from other established markets?

To be competitive, any entity has to offer to buy gold on better terms, such as higher prices, than other established markets.  Better terms also include such things as more convenient sized lots, faster methods of payment, reliable markets, and established jurisdictions in which to do business, etc. Everything is wrong about this sovereign offer to buy gold.  There’s no price!  And it’s a less convenient larger lot size!  And you have to give up the name of your supplier for no consideration!  And you cannot sue a sovereign wealth fund if things go bad.

Finally, words of wisdom for any potential gold buyer.  You are a customer.  He who has the gold makes the rules.  Why?  Because the owner of gold realizes and has realized certain truths; that only gold has value, and paper money might not.  Hence, any time I’ve ever bought gold, I ALWAYS had to pay first; that’s what customers do.  And I never buy from anonymous sources, I only buy from reputable dealers that I know.  Even when I go to buy gold from my suppliers, I pay first; that’s simply how it works.  I know all the major dealers in the USA, or know of them.  None of them would respond to an offer of the kind I ran across.  If you want gold, you buy gold on terms set buy the people who have the gold, not on your own terms.

Who walks into a grocery store and starts issuing demands and setting up terms on how you will buy food?  Nobody. I don’t want to conclude that this is a scam.  Maybe it’s not.  I don’t know everything.  On the off chance this is not a scam, I publish here.  Maybe somebody else who knows this sovereign wealth fund is paying attention, and can clue them in on how to really buy real gold, for real.  Here’s a similar offer that is clearly a scam.  For about six months, I would get about 1 of these every day, offers for both buying and selling:

Silver Bullion I can have the 12MT per month with possible rolls and extensions 8/5 discount bank to bank sellers banking details in tact FOB drafted to him.   The buyer takes delivery F.O.B. at Free Trade Zone of Benito Juarez Airport in Mexico city as destination port. (to be negotiated). Bank to Bank; sellers bank officer will extend invitation to buyers bank officer.

COMMODITY: (ARGENTUM) Silver Bars
ORIGIN:   Mexico.
FINENESS: 999.95 or Better
SIZE:  12.5 kgs in standard Silver Bars
HALLMARKS:    HALLMARK Met-Mex PEÑOLES
International Accepted
QTY IN TOTAL: 12 MT (960) SILVER BULLIONS X month per 5 years with possible Rolls & Extensions

PRICE: Based on the prevailing London Bullion Market Association Second Fix Price (LBMA Price), Silver Fixing on the day of sign of the contract, less discount, plus taxes.

PAYMENT: By Swift Wire to be done upon receipt of acceptable count/analysis certificate issued by refinery showing exact quantity and quality.

DISCOUNT: 8% Gross 5% Net to buyer and 3% to facilitator fees, as compensation, sharing 1% to buyer mandate, 1% to buyer side net and 1% to seller side net (closed)

That is clearly a scam offer to sell silver.  Why?  Because I know that Penoles sells silver in lots of 300,000 oz., which is 9.3 tonnes, at a flat, non-negotiable price of $.15/oz. over spot, delivered to anywhere in the USA.  They don’t sell silver at 8% under spot, nor do they pay any commissions!

People sometimes ask me, “Jason, why don’t you buy silver off the COMEX, and clean them out?”  I don’t do that because the terms are horrible, and the reputation is even worse!  I hear there are horrible delivery delays of up to a month or two beyond the delivery month.  Because even if they do deliver in the right month, it’s no good to have a delivery at a random time during 28 days!  In this business, we need to replace product almost immediately, within 2 days or so.  Instead, we buy silver from major wholesalers, who have it in stock, or who are getting it quickly from the refineries.  Locking in gold or silver for delivery “at any time within a month” is about the worst possible terms that could be imagined.  What kind of a lock is that?  Who can do business on those terms?  Ridiculous!

COMEX is a farce of a gold and silver market.  Attempting to regulate it just seems silly.