Vampires among Us;

Hidden Dangers in the Precious Metals Industry

This is not my first time presenting at the IPMI, as such I always try to come up with something fresh to present. Just when I believed I had run out of topics, I thought it would be interesting to share some of the more harrowing experiences I have had in the precious metals trading industry and how some of these things may have been avoided.

There are real dangers that exist doing business in our industry today. If we do not learn to communicate about them, then the Draculas of the marketplace will continue to thrive as they quench their lust on our hard earned holdings. We have to be vigilant in all things. We have to keep a close eye for the warning signs. Just like Van Helsing we have to preserve the good with good actions, education and sharing. If we do not understand the enemy then how will we be able to fight them?

In this presentation I will go over several situations that I have been exposed to over the years in the marketplace. Some of them are known to many in the industry and others, not so much. But all of them are pertinent.  I could also add many examples from the foreign exchange markets as well but though interesting I thought those might be better over a drink.

In the end the purpose of this presentation is to inspire others to share their stories. To protect our market community from the vampires that lurks within. By doing this we will be putting a wooden stake into the heart of evil.

 Judgment Calls

Some of my stories are basic characters studies but nonetheless useful in understanding the signs.

I recall, this is going back over 25 years ago, a guy calls me up and says he needs to buy silver to export. I remember he was Greek and his office address was in NJ. I gave him a quote and he told me he needed to come in to see the metal. I told him that I would arrange it.

He came in early one morning with his partner. At that time we had our own private security and I with my security team escorted the men to the vault. I had a small bag of the silver grain brought out to show them. They were happy with the look of the metal but wanted to see how it was packaged. I walked them over and showed them the typical 25 kilo bag from Peñoles. The guy’s partner produced a knife out of his pocket and cut the bag! I couldn’t believe my eyes. He turned to Dmitri and said it looked good. I walked them back out. What do you think I did? I called the boss, Mr. Piano, and told him we should NOT do business with these people there was something not right about them. Now I don’t really have any proof that there was a problem there, but in this case I believe I made the right judgment call. I have never seen these people in our market since that chance meeting.

Should I have written down their names in some database somewhere for other industry professionals to be able to reference? Maybe, but at the time I never thought that the information would be useful outside of the company.

In another instance, I recall a Colombian gentleman residing in the U.S., coming to see me. He wanted to sell us gold. He had called me on the phone and told me all the right things. Then when he came into the office two things turned me off. The immediate perception was wrong. The guy had a scar on his face that I avoided commenting about. It didn’t look to me like something caused by an accident or at birth. It looked like a knife cut. Now that alone was not a trigger. Still it put me in a cautionary state.

Then as we sat in the office discussing the pricing I could offer him if he were to bring metal in, he offered me a kick back. Now his offer was not direct but I understood the hint. If we could put through volume I would benefit handsomely. I maintained a cordial attitude during the rest of the conversation. The second I saw him out of our office I called the boss again. I just added another name of someone to the list of persona non-grata at our office.

The funny thing is that I still don’t really know if he was a criminal or not. In our industry we do not share any information so we have no list of suspect persons to cross reference. For all I know he did get someone involved in a scheme and maybe even took down a company with him.

I call this my good judgment calls. I am not saying I batted a thousand my whole career. However I have to say that my first instinct is usually right.

I went against my first instinct a few years ago. I had met a gentleman who was selling gold out of South America. He wanted to do business with us. His model was all on the up and up. It was typical for the marketplace he came from. We did our due diligence the best we could. In fact he had a very good industry reference from that market and that is how he got into dealing with us. I have to admit maybe it worked in his favor that we were a little bit slower than usual and hungry for business. My gut told me “no” though our research had no concrete evidence against this person.

So we started doing business. At first all things were going well. He was doing a good volume and the gold trader was happy doing the business. Then after a few months he owed us some gold. The market started running up against him and he couldn’t deliver. Apparently he couldn’t deliver because of issues with his local government freezing his ability to export.

So was this our fault? The delivery issue was not our fault but assuming the pricing risk was. We had to bite the bullet absorb the market loss and put new procedures into place where we would only price against an airway bill indicating the date of shipment.

This of course could have been avoided had I gone with my first instinct. Just like a vampire, he passed the test when he looked right, yet there was nothing concrete to confirm otherwise. Like looking at a vampire in a mirror, I couldn’t see anything because nothing was there.  I am pretty certain that he would be able to start up again with someone else easily.

There are also the blood suckers that work at slow pace. It may be hard to believe , but they may not have started out that way.  Here is a story I can share. Back in the 1980s Argentina was a major exporter of gold. Mostly it was gold crossing the borders from Brazil into Argentina. Whatever the cause it didn’t matter, for at the company I worked for at that time we were importing about 200 to 300 kilos of gold per week. It was a good business.

Then it got very competitive. Competitors were offering all sorts of credit conveniences. The worst was advancing cash upon receipt of the Armored Courier airway bill. Basically this meant we sent money against gold that was confirmed to be shipped. Much like the C.O.C. of the coin dealer here in the USA. This was to be the downfall.

After many months of trading with one specific company we began to offer them this credit convenience. First it started off normal, receiving the typical quantities on a regular basis. Then we began to receive larger shipments. The gold was good. We were now up to 100 kilos a week. I remember the guy had a nickname “Papucho”. When he flew up to New York he was treated like a king. He didn’t make an exceptional impression on me. I don’t know why but I was not particularly fond of this person. He seemed shifty to me.

Then it finally happened. It was to be their largest shipment to date, a shipment of 150 kilos of gold. I remember when we received that fateful call. I was still only a junior trader on the desk didn’t quite understand what happened. Everyone was running around making telephones call to Argentina. There was a lot of anger and frustration.

Then I finally I heard the story. This particular shipment was sent directly to our trading partner Bache Metals at the time. When they received the bars they noted the actual weight of the bars were odd. It was then that they cut a bar open and discovered they were filled with lead. Essentially we lost close to 50% of the gold content which was roughly 1.1 million dollars at that time. I was never told if we were able to recover any of the monies but sadly I doubt it. That is a lot of money now; can you imagine what it meant back then?

It reminds me of a typical trading company collapse where upper management is so taken with a customer or trader, they ignore simple yet basic business practices. Recall the collapse of Barings Bank, Daiwa Securities and Sumitomo Metals to name a few. It is that constant search for the walk off home run that drives companies and management to make the mistake we made with this customer.

First, did we know the full extent of their financial capacity? It is one thing to give credit but when you trust the judgment of others you have to be certain that they can back up the transaction if something goes wrong.

Second, did we really know where they were getting this new found business from? The big jump in volume should have been a tip off. It should have made us suspect.

Finally, we should have had a maximum amount we would advance on that process without any guarantees or security. This is a very risky business.

How much did that cost the employees in bonus? Or how many legitimate jobs were lost? The costs sometimes are more than we realize.

Counterfeit Coins and bars

I will share the stories and hopefully bring some of these occurrences to the light of day, in doing so we unveil the evil that lies beneath in the darkness. It so often lies quietly in a coffin waiting to resurrect itself, when all have forgotten its existence.

In the 1980s there was one vampire which sucked the blood a little differently. As most of you know, gold coins in many cases trade at a premium. At the time of this occurrence many of the coins traded at about 3 percent or better. What happened, though sounding quite simple conceptually, was actually quite a job well done.

There was person who I actually met; who went by many names, we will call him Mauricio. He asked me regularly if we needed British sovereigns or Swiss 20 franc coins. We had very little demand and so I never bought any from him. The flow we received from our customer base kept us well supplied for our customer demands.

Little did I know that this person was involved in a major gold coin counterfeiting ring. If memory serves me, I was to understand the coins were being manufactured somewhere in the Mideast, I believe it was Lebanon.

It just so happened that we had been buying large quantities of Mexican 50 Peso gold coins locally and shipping down to Banca Cremi, Bancomer and Banamex in Mexico City. I remember I started receiving phone calls about counterfeit coins. It started off as small quantities and then as time went on the sizes were getting out of hand.  I kept going back to one of the major bullion dealers I was buying them from. They kept making good with me on the deals returning the premium paid. The coins were of real gold so it was not huge. Though the premium loss on one coin was nominal, compared to the value of the metal, the volume of coins with my company alone was in the thousands, such that it was significant money being sucked out of the truly deserving.

Also being produced at that time and most likely by the same person were counterfeit sovereigns and 20 franc pieces. To this day we still find many of all these counterfeit coins in the marketplace. For the investor it is a jolt when they find out that for many years they were holding onto fakes. These items have not grown in premium and luckily for the investor the gold content was legitimate so losses in the end were minimal. Still if for some reason these products had actually grown in demand and the premiums had risen there would have been significant clamor from those receiving much less after they went to sell the items.

At least two people went to prison that I know of in the USA for this Mexican 50 peso incident. In the end the scourge was vanquished but these types of scams are actually becoming a greater threat to the numismatic industry where high premiums are attracting expert counterfeiters not only of coins but of “coin grading holders” such as PCGS and NGC produce.

Now just recently it has come to our attention that there are counterfeit Silver bars, coins and Pamp gold bars. Of course they are not made of silver or gold so the weight is completely off. None of these could pass by a person who regularly handles precious metals but for the novice such as an Ebay buyer the public could get suckered.

Is there an association dedicated to sharing and archiving of this information? Is there anywhere that a new industry professional can read about these past occurrences? Sadly, they can only get these stories from industry relics such as me or find them on the internet.

Drill and fill

In the 80s we never thought of the possibility of fake silver bars. To do this you would have to have the knowhow and equipment. With the price high it was only a matter of time until someone decided to do it to profit at others expense.

It came to be that 100 ounce silver Engelhard bars were to be the bane of many a trading company. I was buying the cheapest silver I could find in the market to supply a consumer in South America. It didn’t matter to me the form, only I didn’t want grain because of security reasons. It was in short order that I found out that there was a reason why I could get 100 ounce bars for the same as large bars. There was a glut. But why was there a glut in the first place? Mostly because silver was being dumped as an investment choice but surely there was plenty of these filled bars as well.

It became apparent once I made a shipment and was notified that my customer received bars that were filled with lead. He mailed me pictures immediately and I sent them to my supplier. Luckily I was buying and shipping only from one provider direct to the consumer. Hence there was no question as to the origin of the bars.

When I saw the pictures I couldn’t believe my eyes. This was in 1998; many believe that the origin of these bars as far back as the early 1980s, though there is no concrete proof either way.

I was buying these bars from Smith Barney. The volumes were significant and on a regular basis. The biggest danger when selling this kind of product is that any variance in quality if being used for jewelry or industrial consumption could destroy an entire process. In other words not only does the buyer get ripped off but the end user destroys an entire batch of alloy being manufactured for a specific purpose. That being only the tip of the iceberg with replacement costs to reship the material and finance creating another finical burden to my customer.

 I had to reclaim about 10,000 ounces to reship out of shipment of 100,000 ounces. When I went back to Smith Barney it caused a major upheaval. They had to withdraw all the 100 ounce bars they had vaulted and send them to refiner. Which had to be much more than the quantity that I had bought, their inventory could have been in the millions for all I know. A boon to the refiner, but it was a major loss to the dealing company.

How many years were the bars sitting in the vaults? How many of these bars still exist today? There is no way of knowing for sure unless every vault that has these sitting on their shelves was to remove them and cut or drill them to see if they are legitimate. This of course would be a major undertaking. Unlikely to be recommended and even more difficult to executed. To this day many precious metals dealers still drill or cut the 100 ounce Engelhard silver bars on a regular basis. Honestly they should be cutting or drilling all the larger size bars if the weights are off and they have been out of the official chain of custody.

Then most recently it came to my attention a drill and filled Metalor gold kilo bar spotted in the UK. It was one early afternoon when a visitor from Germany was in my office and he received an urgent email about it. He forwarded the email to me and of course I went on to share it with many other precious metals dealers throughout the community.

In the email it was noted that the jeweler who received the bar was suspicious because of its feel and it didn’t say, but maybe the source as well. He then weighed the bar and it was off by only 2 grams still this was enough to make him uncomfortable so he cut the bar in half and found out that it was filled with tungsten. He was saved by his common sense and practicable product knowledge. Thanks to his find, I believe he woke up the rest of the market to a very real and present danger as the vampires still lurk in dark places producing their evil plans to undermine our industry. But by the light of day and armed with truth and light they cannot withstand the test and so they will continue to ultimately fail. But some still get hurt along the way that lacking knowledge and with unfortunate ignorance are unprepared to deal with the blood sucking scams of these perpetrators.

In India it has been reported that some gold has been successfully mixed with iridium. Now iridium, trading at about $1,000 an ounce, is not as bad as being replaced with lead at 95¢ per pound and tungsten at $1.60 per pound but it still undermines the purity and value of the products we buy and sell to the public. Not just in the area of investment bars and coins but it can be as far reaching as jewelry and manufacturing. This is why best practice programs are something that needs to be developed and shared. We need to know all the details and methods to protect ourselves and the industry. Just like Van Helsing we have to be armed by first recognizing the enemy and by having the right weapons at hand. As he carried the cross and sacred host, sacramentals that would decimate Dracula, we need to have our own sacramental, to be able to defeat these demons.

No Shadows, no Reflection: Must be a vampire

There are other types of blood suckers that sometimes can go undetected. One type is internal within our organizations. These types get into some position of authority where they have the ability to circumvent security features that would otherwise detect if metal goes missing. This is something that is most difficult to catch because in this case the vampires has already hypnotized us and started drinking our blood. So we are under his control and weaken as the days go by. The best way to protect ourselves against this is to be armed with foreknowledge. By doing so beforehand, we avoid great pains in the future.

One instance I can recall may not be found immediately. However if internal controls are tighter and aware of the threats then it would better protect the organization. For instance I recall that metal went missing in one plant I heard of because the manager of the base metals waste was able to throw some precious waste into the mix.

You see the genius in this. Because it is mixed with other metals it would not be so easily discovered. The refuse that usually goes for the recovery of the precious metals starts to turn up with much lower precious metal content. The manufacturer then looks to find where the metal went? The blame initially will go to the refiner but if the loss persists then they look at the process. By the time the manufacturer figures out that all the material was not shipped to the precious metals refiner it is too late. The precious metals already went out the door and was refined and sold most probably under someone else’s name.

In this case you can plainly see how no shadow was cast. It was as if dealing with a ghost. But all the time the metals were being taken out right under their noses. To kill this devil takes the same effort as with all others. It is the sacramental of foreknowledge. When we can see in advance the possibilities we can work to protect ourselves against them. However, everyday there are newcomers who get hurt unnecessarily and even some professional that just get lax or have let someone else manage their metal movement who had less experience in the management of these valuables.

Still there are other vampires much more dangerous and elusive. The kind that is so difficult to discern because they keep their mouths closed so you can’t see their sharp white fangs. Their eyes give the appearance of peace and tranquility but that is an illusion. Maybe in the beginning when you start doing business with them they were not yet bitten with the venom of greed which turns them into a vampire. Maybe at first they were honest legitimate business partners. Still somehow they were changed. Something or someone lead them down the wrong path. What was initially a good relationship turns sour as suddenly you find that you start losing blood at the expense of this venomous type.

In one instance I can tell a story of businesses where the venom of the vampire changed a legitimate business into one of its own ghostly apparitions.

In the 1995 one such business was the exploitation of the Argentinean taxation arrangements. It started out with a company exporting gold products to be refined in the USA. They were doing so to reclaim a tax upon export. This was money they didn’t legitimately earn since they were not producing it as a product for export that truly added value and created jobs. Instead they were sucking the blood of their fellow citizens by fleecing their own government.

So with their new found ill gotten gains the vampire makes his way to the shores of the USA. With his coffers being full he is ready to take another bite. This time with suaveness in his actions and suggestions he engages the refiner and a private banker to participate in the growth of his blood sucking schemes. Now he wants to export products said to be made of “gold” but which are only gold plated.

Just imagine, let’s say we export $1mm worth of gold and the tax returned was 8%. In today’s dollars that would represent $80,000 per transaction. Now, let’s do that three to four times a week. That would represent $320,000 a week, which is over 16 million dollars per year. Wait, it gets better. Now with more cash because I don’t really ship gold but ship some other metal plated gold. I can make shipments twenty times the size. That would be over 330 million dollars a year. I guess you can see how this vampire was able to assert his evil presence by inducing the refiner to accept terms amid export documents that he truly received this gold. The promise of riches was so great that the person involved could not resist, but like all false promises the only thing the vampire truly gave was death.

By this path they committed many crimes, fraud, theft and money laundering. First, they lied about the metal content. Then they reclaim the tax on export from the government, theft. Finally they wire the money to pay for this service, money laundering. This event took down a major refinery and a private banking company in the USA while sending several people to prison in both the USA and Argentina.

There is another that is formed in the mist. As usual one we have to truly study to discern. Because this creature hides its true colors while feeding you lies. It starts off benign; in fact giving the impression of benevolence and kindness all the while something else is brewing underneath.

There are many things that cannot be clearly foreseen. Why is that? Many times because it is so obvious that we believe it can’t be possible. Think about it. The real estate prices were going through the roof in early part of the last decade. The mortgage business was booming. Credit was loose and money was easy. It was obvious to so many but no one took the time to look for the truth. We all knew nothing can just keep going up like that without stopping still it went on until its eventual implosion.

The tech bubble was the same. Stock traders were buying anything related to the internet. The public was jumping on the band wagon. Prices kept rising. Meanwhile the actual facts were not there to support the prices. If we only looked and realized that when it was held up to the mirror there was nothing there, then maybe we could have avoided this pit fall. But the only way to to find this particular ghoul is to use the mirror.

The single most important thing in all business is trust. In giving our trust we take risk and usually when you are talking about precious metals you are talking about credit risk. Even when you don’t lay out the cash, a promise to do a transaction can be just as risky if you had given the other party a checkbook.

It often comes to pass that when dealing with other dealers we get comfortable. It is worse when we start to trust without any real concrete foundation. That is why we need to always establish criteria to protect our business from the abuse of friendship and trust.

When dealing with a publicly held company, though not foolproof, it is highly unlikely that you will get stiffed. Of course that is unless you were doing business with General Motors in the last decade. If you recall GM had forward trades for palladium on their books with Stillwater and reneged on the deals. Somehow our friends at Stillwater were able to survive that debacle but I am certain it was not a happy situation. Still this is the rare exception. Stillwater in this instance had no way of knowing that there was anything wrong. It wasn’t until the perfect storm happened of the high crude oil prices with the economic collapse that essentially combined to kill General Motors business model.

However it is the proper procedures of having financial statements and market information about the people you do business that will be the sacramental needed to protect you and your business.

In this one particular case a dealer in precious metals market place was growing well and doing significant business with every important player. They were known everywhere but it was if they came out of nowhere. They had existed for a while but not in the size and presence which they now projected. They were doing good healthy cash business. It was on going for a good period of time. Hence confidence was high.

Then the dealer calls to do a trade out of the norm but still because you have such a good relationship you feel obliged. The first of these trades happens, a forward deal and it settles fine. Yet no proper relationship or managing of credit has been established. The next time they call since the first settled well you feel no problem with doing it again. But yet there is something wrong with this picture. No information was gathered. No understanding was made as to why the sudden change in their business model. Complete trust was given and that is not the way to run a business.

A second sign of problems is the following. When they ask you to roll forward a transaction that is not their normal business to begin with. Suddenly you wake up and realize you have no security in this transaction. You ask for margin money to secure the transaction and ask for financial statements to understand better the why of what they are doing.  Then upon receiving the financial statements you are surprised to find out they are nowhere near the size of the business you trust them with. The margin money they send you is not even the full 10% you requested. Of course at this stage it is too late. You are now beholden to them. You need to keep this deal going and hope they are able to settle.

In the end, what happens? Their situation comes to light. They have problems and are unable to settle the trades. Now you are looking at taking losses for something that should have been avoided since day one.

Every morning you start to wake up feeling sick, knowing that something is wrong but you can’t quite put your finger on it.

The best defense we can have in this industry is preparedness and foreknowledge. But the only way to do this is to start to share with each other within in the industry. I don’t know anywhere where leaders of our industry come together for the purpose of better arming ourselves against the weapons of the enemy.

Avarice is always the driver behind all these situations. Some involve people in the market directly but more often than not it comes from outside. But for the greater percentage of people in the industry we need to get together and create a forum where this information may be documented and shared.

Can it be that we are so myopic in our view of the world that we do not realize how dependent we are on each other? Is it not better that we organize to defend the industry and consumers? If we do this then interest in our marketplace can only grow. Consumers at all levels will have greater comfort knowing that there are companies that take this responsibility to ensure the products and services that are provided are the real deal. That business does exist, not only out of the natural need to be industrious and produce, but from the desire for the betterment of society at large.

I propose this day, that we at the IPMI start a new chapter in our history. That this conference be remembered as the one that took a simple idea of confidence and trust, among our peers, and turned it into not only a proposition to establish best practices for protection against the vampires among us, but that we change the face of the community by creating a better environment for all involved. This type of change will only foster growth and help the industry continue to grow.

Let us not leave this meeting today as if nothing was said. Let us instead gather together and form an association for the protection of consumers and the industry. Let the vampires hide in their dark caverns and cower knowing that we will be coming with our sacramental; the deeds of the undead will not go unchecked. That we will seek them out and destroy the death they presume to bring on us. We will not let them sink their teeth into our lifeline. We will not become like one of them for we bring light into this world because we trade the precious metals that shine for all to see in splendor and beauty and not out of greed but in industry and creativity for all.