The problem of fake gold bars

By Felix Salmon
March 25, 2012
conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten.

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You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

Of course, there are means of testing gold bars beyond just weight and XRF. If you can weigh the bar accurately, then you can test for purity by essentially dropping it in a bucket of water and seeing how much the water level rises: a gold-covered tungsten bar will displace more water than a pure gold bar. Alternatively, for $3,000 or so you can buy a micro ohm meter, which is easily sensitive enough to tell the difference in conductivity between a pure gold bar and one which is largely tungsten.

But as far as I know, these tests are not particularly commonplace among gold dealers, and in any case only a minuscule fraction of the gold bars in the world are physically traded, changing hands from one owner to the next — the obvious point at which tests like these would be conducted. If you own gold — if you’re a central bank, say, or a physical-gold ETF, or even if you’re just a Ron Paul or Glenn Beck type with your own personal stash — then there’s no realistic chance at all that you’re going to go bar by bar through your own holdings, testing each one.

In the case of gold, then, what JK Galbraith famously called “the bezzle” — the amount of wealth that people think they have, which in fact they don’t have — could be truly enormous. If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there. At $1,660 per ounce, that’s over $600 billion which people think they own but don’t. To put that number in context, it’s roughly half the total quantity of subprime mortgages which had been issued at the height of the housing bubble.

On the other hand, it’s also possible that the number of salted 400 oz bars is zero, that the 1 kg bar recently discovered was an amateurish aberration, and that there’s nothing to worry about at all. But the economic incentives here are so enormous, for people looking to make a fortune in the fake-gold-bar industry, that I very much doubt no one has tried. And statistically speaking, if a bunch of people have tried, then some subset of those people will have succeeded.

So what to make of the fact that no salted 400 oz bars have yet been found? On the one hand, it can be viewed as very worrying — as being an indication that the gold markets are very bad at uncovering such things. On the other hand, you’d think they’d be good enough at it that they would have uncovered at least a small percentage of the salted bars outstanding — and if they’ve uncovered no such bars at all, then that can be taken as an indication there aren’t any salted bars outstanding.

In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger.

Update: Thanks to smart comments from BronSuchecki and Tim Worstall. I forgot that gold is actually used, once in a while, to make things like jewels — which means that bars are melted down pretty frequently. If there was a significant number of salted bars out there, we’d know about it, since you’d notice when one of them got melted down. Which isn’t to say that there are no salted bars at all, but it certainly does seem to imply that there’s nowhere near 1.3 million of them.


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Felix, these website you link to appear to believe that the Clinton administration and the Fed engaged in a secret plot to dilute and then sell the gold at Ft. Leavenworth. Can you provide any links to this story from any sites that don’t think “Sir Alan Greenspan” was behind the tungsten?

Posted by Hippopotamus | Report as abusive

“there’s clearly now serious tail risk for anybody in the physical-gold market”

bingo – this was my reaction: the Goldbugs immediately got EXCITED about this story (under some perverse logic that it means there’s less physical gold out there than we thought – ignoring what it does to the demand side of the equation) – but it’s not a good thing for gold!

Posted by KidDynamite | Report as abusive

ps – Felix – just out of curiosity, where did you get the hypothetical “If there are 1.3 million salted 400 oz bars in existence…” ???

Posted by KidDynamite | Report as abusive

Maybe it’s just me, but greed begets greed.

Posted by GRRR | Report as abusive

So, you’re telling us that a serious investor would walk in to Ye Olde Trader’s Shoppe and buy a 1kg gold bar with no certificate of authenticity from…oooh let’s say a bank or reputable dealer or insurance or, or, or..

Felix, I don’t know what’s worse; this story doing the rounds AGAIN or that a normally smart financial blogger wasted part of his Sunday (as well as a tiny chunk of his reputation) on running a breathless post on it. Financial rip-offs are all around us, always have been always will be and shock! horror! I’m sad to report that gold as a medium for rip-offs is not a novel idea. Really, the people that might fall for a tungsten wrapped gold bar are just one step ahead of those who answer the spam mails offering genuine 24kt gold dust from Nigeria. You’re too good to get dragged down to this level of commentary.

Posted by ottorock | Report as abusive

You’re all missing the point of this article. If a bar had been drilled out and partially replaced with tungsten, you would have a bar that is worth only a fraction of what you thought it was. Whereas if you bought GLD and then it suffered a credit event, you would have NOTHING.
Counterparty risk is an element of every transaction. Anyone who accepts a large bar of gold WITHOUT testing by infallible means is an imbecile who deserves to be stolen from. You’re buying upwards of a half-million dollars of gold and you can’t afford to even RENT the machine that will test it accurately?
Make no mistake, this article is all about counterparty risk, though the author is trying to make you think the opposite. Even with a salted gold bar, at least you have something. When the fiat tower crumbles, whether your investments are in cash or bonds, warrants or stocks you will have NOTHING.

Posted by lnardozi | Report as abusive

Hey, wait – you’re Felix from ZH!!! What’s up Felix? I don’t understand… I have always believed you to have given solid and honest advice.

Posted by lnardozi | Report as abusive

I think the main point here is: How many salted gold bars are out there, and what are the implications of that? And Felix is simply pointing out that the evidence suggests that (1) They exist and (2) Guesstimating a figure is extraordinarily difficult.

A guesstimate would be much simpler if we had some estimate of how often gold bars are tested when they change hands. If this happens 99% of the time, there can’t be many salted bars. On the other hand, if most people don’t bother with a density test (and I’d be amazed if they don’t with something of that value, but I don’t know this market), there must be lots.

Just to get people who worry about this slightly more worried: gold-plated tungsten will fail the density test, but this is because tungsten is slightly *too* dense. Making sure you leave some small hole of the right size, or add the right amount of almost any other metal (most metals are less dense), should solve this problem. This is an example of a very shoddy forgery. Somebody who took their forgery as seriously as they should when we’re talking some decent money, should have no trouble at all producing bars of the right weight and density. As Felix points out, conductivity would still show… but frankly, I think any competent chemist should be able to produce a gold-plated bar that passes most tests except cutting it in half.

Posted by Doly | Report as abusive

A little googling shows that this is a rather old story: 3/how-make-convincing-fake-gold-bars

Assuming (as stated upthread) that tungsten’s density is higher than gold’s, it shouldn’t be too hard to make a tungsten alloy that has exactly the right density.

Posted by MattF | Report as abusive

Seems to me that gold-plated tungsten is every bit as useful as pure gold for the usual purposes… No? Why would anybody care?

(And I’m only slightly tongue-in-cheek.)

Posted by TFF | Report as abusive

@TFF: lol./ brilliant.

Posted by KidDynamite | Report as abusive

“the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten”

It would be very difficult if not impossible to do that and finish it off to make it look authentic. Cast bars have a unique finish due to the casting process – trying to plug the drill hole ends with melted gold and then seamlessly blend that into the exiting bar surface is very hard.

“XRF (X-ray fluorescence) tests”

XRF does not penetrate very far into the surface of a bar, so is only good for testing plated bars. The industry uses ultrasonic testing, see here 9_14_genel_pamp_use_of_ultrasonic_analys is_for_the_quality_control1.pdf

“only a minuscule fraction of the gold bars in the world are physically traded”

The amount of turnover in the market is much higher than you think. In the case of the professional market which deals in 400oz bars, yes many of these sit in central bank vaults but many others are held by private investors and these are traded. There has been no occurrences in my 18 years in the industry, and I haven’t heard of others, of fake 400oz gold bars. Any bar coming out of a LBMA accredited refinery can be trusted because the refinery cannot control or know where the bar will end up and during its life there is a good chance a bar will eventually be melted for use by a jeweller or other refiner and as such there is a high probability of being caught out.

In the retail market I’d guess that turnover is a lot higher, particularly as retail investors do tend to exhibit herding behaviour, which means when there is selling it usually overwhelms retail buyers at that point in time. The end result is that in a net selling situation dealers do not sit on gold due to the high holding costs vs low profit margins and uncertainty as to when buying demand will return, so they liquidate that net selling excess back to refiners, where it is melted. Thus there is a fair bit of turnover and again, a good chance of fakes being detected.

“If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there.”

This is silly speculation as it would be impossible for such a level of fakery to not to come to the surface. You can be sure that a refinery would like nothing better than to find extensive fakes in its competitor’s product and thus put it out of business. The rest of your “on one hand” “on the other hand” adds nothing.

“there’s clearly now serious tail risk for anybody in the physical-gold market”

Based on your lightweight speculations you seriously think readers should consider the tail risk to be serious? If you buy from a reputable refiner from a reputable dealer you will not have any tail risk. This resource is a good place to start if you are unsure of what bars should look like and their measurements.

Posted by BronSuchecki | Report as abusive

Your solution of a Wheatstone bridge (micro-ohm meter) is flawed because the current used to do the measurements will find the the path of least resistance, which will be across the surface of the bar. Unless you were able to insert the probes fully into the tungsten, your values will equal the resistance of gold. I guess if you cranked up the amperage to the point where you saturated the the gold and the electrons had to cross the tungsten you could see the difference, but I also suspect you would see it from the puddle of molten gold and the solid tungsten core.
I believe a MRI would be quite effective. There would be a quite a difference of magnetic response at the region where the gold stops and the tungsten begins. You wouldn’t be looking at the pretty pictures but rather at the response curve.

Posted by OnkelBob | Report as abusive

The method of weighing the gold bar and then drop it in a pot of water and measure the volume diplaced was the method used by Archimides. This was he discovered that the jeweler who produced the crown of the king of Syracuse was a crook

Posted by reuterskostas | Report as abusive

I’d love to type something profound, but I’ve got to jump out of this tub and run about shouting “Eureka” for awhile now. I’ll be back — if nobody locks me up first.

Posted by Christofurio | Report as abusive

Who needs physical gold when you have a piece of paper that says someone ELSE holds your physical gold! There’s the ticket!

Thanks TFF, for the laugh, but some people take their gold veddy seriously (In India… you are blaspheming with that tongue!) but being Tungsten is used in the best quality darts, I think I favour the tungsten.

Posted by youniquelikeme | Report as abusive

But how many salted nut bars think the tungsten bar of the exact same dimensions as the gold bar it replaces would displace a different amount of water?

Posted by Eericsonjr | Report as abusive

Another question is how many bars in ETF’s are actually borrowed by their contributors and submitted to the ETF in return for shares to sell back to the retail investor? Whose property are they? Gold leasing is 0.5%-1.0% a year. If a bank contributed borrowed metal into an ETF, they sell shares back at 100% face-value, that’s a 99%-99.5% profit in the first year. There’s nothing in the GLD prospectus that bars this practice. They don’t ask where the incoming metal is coming from. I bet if you checked GLD’s bar list against Central Banks or Bullion Banks who lease metal, you’ll find duplicates.

Posted by Abe.Froman | Report as abusive

I thought that the reason the bar was 2 oz short is probably that to make it the same weight, they would have needed to make it larger than a normal gold bar.

Looking up the density values of various elements I find different tables have different values. This one says Tungsten is higher density than gold, but not by much. Look up Chemix density element chart for a cute graph of how density varies by element.

Density Element
19.32 Gold
19.35 Tungsten
19.84 Americium
20.2 Uranium
21.04 Rhenium
21.45 Platinum
22.4 Iridium
22.6 Osmium

This chart shows density with Tungsten less than gold.
18.95 Uranium
19.25 Tungsten
19.282 Gold
21.02 Rhenium
21.46 Platinum
22.610 Osmium
22.650 Iridium

2 ounces of gold is 2.33 cubic cc, which is non-trivial.

I would guess that three things could have happened to screw up this thievery.

1. They used a density chart that was different than the density of the tungsten metal the thieves actually got hold of. Their tungsten was slightly lighter than gold, but they had planned that it be slightly heavier. But they couldn’t make the bar 2.33 cc larger than than normal.

2. The other problem the thieves didn’t think through is that when you drill out gold and insert tungsten, there will be voids in the bar that will make it lighter. Tungsten has a melting point of 3422 C. Gold has a melting point of 1064.5 C. If they had a regulation mold, they could pour molten gold on top of their drillout. But they couldn’t melt the whole thing, or they would risk having the tungsten block move and become visible. So there would still be air-voids, small, but significant. If they inserted the tungsten, then just soldered gold back over it, the air-voids would be a big problem. It would take an expert machinist to match the holes in the gold bar so tightly there would be no significant voids. But if the did that, then they might need to do their work in a vacuum in order to make it possible to push the perfectly fitted tungsten in.

I think that is where most of the 2 missing ounces came from.

3. The thieves could also have had one of their number stealing tungsten from them. Tungsten is $23 per ounce. Let’s say the thieves took 200 oz of gold from 300 bars and one of them pocketed 2 oz of tungsten per bar. That would be 60,000 ounces of gold, which they could sell at a price of $1600 per ounce for $96 million.

The thieves would need to buy $1.38 million worth of tungsten to do that. I volume, they could doubtless get a discount off the $23 spot price. The tungsten thief could net himself 600 ounces of tungsten, which he could sell for around $12,000 (presuming he doesn’t get the spot price).

The Achilles heel among thieves is that they don’t like to share. There would probably be three men, at the very least, 2. One of them would be the money man who fronted for the tungsten. He would expect to get almost everything. One would be an organizer, perhaps an assistant for the job. And one would do the actual hand-work. It is usually the case with criminals that the guy doing the hard work is not terribly bright, and gets the short end of the stick. They probably paid him a pittance for his work. Let’s say they were “generous” and gave him $50 an hour. Let’s assume one hour per bar, for 8 or 10 hours a day, two guys. So that low man on the totem pole would net $15,000 for his work.

But, the low man isn’t a complete idiot, and if he was cunning he would realize that the smart guys would be watching the gold like a hawk, but wouldn’t be watching the tungsten so closely.

So the low man could almost double his take. What does he care if the big guys get nabbed eventually for their score?

Posted by BrPH | Report as abusive

Not to nitpick here but you’ve misunderstood Archimedes. A tungsten bar and a gold bar of the same volume will displace equal volumes of water as they both are entirely submerged. In fact, any object of the same volume with a density less than water will displace the same amount of water.

The point is comparing that volume to their mass, to arrive at their density. Tungsten and gold have very similar masses, but there is a difference. Take the mass of the bar (it’s weight), and divide it by the amount of water it displaced to arrive at density — that is the number that will differ.

Posted by danbemp | Report as abusive

Bars can be traced – so there is some risk in salting bars because eventually you will be found out.

Posted by jimbostink | Report as abusive

The best solution to remove the doubt is to control the ingots by a rapid and accurate method.
The best method of detection is to measure the actual conductivity of ingots.
for this, it is necessary to measure the electrical resistance and the geometric dimensions of the object, and this with extreme precision. The scanner CHECK GOLD developed by the firm JC-Engineering meets the requirements of control. In particular, the measurement when the tungsten content is in powder form, does not detect that the processes using the ultrasonic reflections.
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Posted by jclausin | Report as abusive