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Information Bulletin - Bullion Quality

There have been a number of articles on the Internet about tungsten-filled gold bars, as well as fake and counterfeit coins being in circulation. As precious metals prices continue to rise, there will be more and more scams involving precious metals that will prey on individuals trying to save money on the purchase price or storage costs. This is false economy, as well as a risky approach that could result in a complete loss of their investment instead of having precious metals preserve their wealth.

Precious metals do not sell at a discount. Any metals offered at a discount will either not meet good delivery standards, have illegal source backgrounds or are to be delivered at a future date. Purchasers should remember that it is much easier to create fake or counterfeit coins and bars than it is to create counterfeit paper money. The potential profitability for criminals is very tempting as tungsten, which closely matches the density of gold, sells for about $45 USD per kilogram, a fraction of the price per ounce for gold. At Bullion Management Group Inc. (BMG), we receive many offers to purchase bullion at a discount, and simply dismiss all such offers as not being credible. Very low storage fees are also suspect, as they typically involve pooled accounts that may not be backed by bullion, or the bullion is leased to third parties.

BMG deals exclusively with ScotiaMocatta, a division of The Bank of Nova Scotia, for all of its bullion purchases. Records trace bullion transactions in London back to the 17th century with the formation of the oldest original member of the market, Mocatta & Goldsmid, in 1964. It was, however, the introduction of the London Silver Fixing in 1897 and the London Gold Fixing in 1919 that marked the beginning of the market's structure and of the co-operation between members that has created the marketplace as it is today.

The growth in the number and type of market participants in the early 1980s, combined with the introduction of the Financial Services Act in 1986, brought about the formation of the LBMA in 1987. Mocatta & Goldsmid was purchased by The Bank of Nova Scotia in 1997. ScotiaMocatta is one of the eleven market-making members of the London Bullion Market Association (LBMA) while BMG is an associate member of the LBMA.

The rules established by the LBMA mean members can trade bullion between themselves without concern as to the quality or the purity of the bars. Daily Turnover, the net difference in trades among LBMA members, is in excess of US$37 billion for gold and US$5.45 billion for silver. The actual volume is estimated at 7-10 times the Daily Turnover amount.

The LBMA sets the rules for good delivery bars. In January 2004, the LBMA introduced Proactive Monitoring of the refiners on the Approved List, an important initiative which further enhances the reputation of the List and the refiners on it. Prior to the introduction of Proactive Monitoring, a refiner only had to demonstrate its refining and assaying ability at the time of its application for admission to the List. Regular monitoring of those on the List ensures that the stringent requirements for joining the List continue to be met.

The monitoring system necessitated the appointment of Supervisors (to witness the dip-sampling operation that provides samples for testing by the LBMA's Referees). The monitoring operations are carried out approximately every two months.

If a refiner produces both gold and silver, it is tested for both metals at the same time. Gold refiners that only produce and sell "four-nines" gold may elect to be monitored by assaying a set of reference samples (ranging in fineness from .995 to. 9999) sent to them by the LBMA. These samples have been produced and crosschecked to the highest standards by the panel of Good Delivery Referees.

If the LBMA receives a complaint about the quality of bars produced by a refiner, it investigates the complaint and carries out a bar examination if necessary. If the complaint appeared justified, the LBMA writes to the refiner asking it to "stand behind" its bars by making appropriate restitution to the customer.

Bars traded by LBMA members are maintained within a "Chain of Integrity". This refers to a traceable chain of custody among trusted trading partners where bullion bars are accepted at face value without an assay test. COMEX rules specify an official "chain of integrity" for COMEX GOLD contracts. The LBMA maintains a list of acceptable member refineries that meet certain membership requirements and have passed assay tests. Bullion products from these refineries will generally be accepted by other members of the LBMA at face value without further assay testing. However, the LBMA's chain of integrity is purely informal. When purchasing bullion products the face value can generally be accepted if the product can be shown to have remained in the custody of a certified bullion repository since its manufacture by an acceptable refinery.

Responsibility for the regulation of the major participants in the London bullion market lies with the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000. Under this Act, all UK-based banks, together with other investment firms, are subject to a range of requirements including capital adequacy, liquidity and systems and controls.

Introducing bars into the LBMA system requires the sale or deposit of the bullion with an LBMA member. Documentation may be required in order to comply with Anti-Terrorism and Money Laundering legislation such as FinCen in the USA, NCIS in the UK, JFIV in China and Hong Kong and FINTRAC in Canada. The identity of the bar owner needs to be established and confirmed, as well as the source of the bars.

If the documentation and the background checks passed scrutiny, then all bars coming from outside the Chain of Integrity are re-assayed and re-cast to Good Delivery standards at the cost of the owner. For bars coming directly from an acceptable refiner, or from another LBMA member, spot checks are made to confirm weight and purity.

In some instances, typically bars from "Deep Storage" from central banks, bars that meet acceptable purity and weight but that do not meet Good Delivery Standards for physical appearance are also required to be recast. The LBMA clarified their position for "Deep Storage Bars" in a press release in 2007.

In addition to the checks and balances provided by LBMA and the FSA, BMG receives sales confirmation documentation for every bar purchased from ScotiaMocatta. This documentation details the refiner, the weight to three decimal places and the purity to three decimal places. In addition, The Bank of Nova Scotia, as Custodian, provides detailed inventory lists of all the bars held in storage. The physical inventory is verified annually by BDO Canada LLP as part of their audit for both BMG Funds and BMG BullionBars. These lists, for both the bars and the Funds, are posted on the BMG website.

As a result, purchasers of either the BMG Funds or the BMG BullionBars program are assured that all bars purchased meet Good Delivery Standards.

As a result of these checks and balances it is highly unlikely that fake or counterfeit bars would ever enter the LBMA Chain of Integrity. Should it be discovered that a bar did not meet Good Delivery or was not of the stated purity or weight, The Bank of Nova Scotia and the LBMA would intervene to correct the situation in order to meet the representations in their sales documentation.