[REN #922] Gold Fraud: $2.2 Billion in Fake Gold out of Wuhan, China

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Gold Fraud: $2.2 Billion in Fake Gold out of Wuhan, China, Real Estate News for Investors Podcast Episode #922

If you have gold in your financial portfolio, beware of any holdings connected to Kingold Jewelry. It’s now at the center of a massive gold fraud scandal. And what adds another layer of intrigue is the company’s location, in Wuhan, China, which is the epicenter of the current pandemic.

The gold scandal is not connected to the pandemic, but is it creating new shockwaves connected to China. According to a report by Zero Hedge, 83 tons of fake gold were used to secure loans and insurance policies for Kingold. The gold is supposed to be worth 16 billion yuan or about 2.2 billion dollars but it was discovered that the gold bars were just gold-plated copper. It’s believed to be the biggest gold counterfeiting scandal in recent history.

One of China’s Biggest Gold Jewelry Makers

Kingold has been around for a while. Zero Hedge says, it was founded in 2002, and is one of China’s biggest gold jewelry makers. Before that, it was affiliated with the People’s Republic of China but was split off during a restructuring. It is suggested that the name Kingold was adopted because it’s similar to gold producer Kinross Gold. It became a publicly-traded company on the Nasdaq in 2010, and is run by an ex-military man who is the controlling stakeholder. Zero Hedge claims that his military connections have given him leeway to basically “do what he wants.”

The scam was discovered when Kingold defaulted on loans this last February. That creditor apparently checked the gold it had as collateral and discovered it was fake. The news spooked some of Kingold’s other creditors who also checked their collateral and found the same thing. Zero Hedge says, Kingold has pledged gold to no less than 14 creditors. Most are outside of Hubei province where Wuhan is located because local banks and financing companies have avoided doing business with Kingold. They haven’t made a public display of that however, because of Kingold’s connection with the Chinese army.

Zero Hedge says, “In the case of Kingold, the company said it took out loans against gold to supplement its cash holdings, support business operations and expand gold reserves, according to public records. It then appears to have decided to apply a gold-layer to tons of copper and pretend it was money-good gold collateral. And even more shocking, for years nobody checked the authenticity of the pledged collateral!”

Lenders Must Account for Lack of Collateral

The scandal goes deeper than fake gold, however. It allowed billions of dollars in gold that doesn’t exist to flow into the Chinese economy, and Chinese lenders that must now account for the lack of collateral. Zero Hedge says, the fake gold accounts for about 4% of China’s gold reserves, and that’s assuming that no other gold producers or jewelry makers in China are doing the same thing.
The report also suggested that that would be a bad assumption.

In regards to a much bigger gold counterfeit scandal, it says, “Once Chinese creditors or insurance companies start testing the “collateral” they have received in exchange for tens of billions in loans and discover, to their “amazement”, that instead of gold they are proud owners of tungsten or copper, they have two choices: reveal the fraud, risking tremendous adverse consequences and/or prison time, or quietly buy up all the gold needed to literally fill the void from years of gold counterfeiting.”

Zero Hedge is guessing that creditors with fake gold on their hands will be scrambling to buy the gold they need to replace that fake stuff. That in turn, could push the price of “real” gold much higher. So if you own some real gold, you might be in good shape.

Kingold Hits a New Low on the Nasdaq

This story has also driven shares of Kingold to a new low on the Nasdaq. At last check, they were just 60 cents a share. A securities fraud investigation is underway. The Chinese government has also launched an investigation and the Shanghai Gold Exchange has disqualified Kingold as a member. The Kingold chief denies anything is wrong with the gold provided by his company. In an interview, he blamed the problem on some low quality gold the company acquired in earlier days.

If you want to read more about the unraveling of this counterfeit scheme, check out the story on Zero Hedge. It reads more like a financial who-dunnit that includes the unlikely $1 billion purchase of an auto parts company. Kingold had said it bought the company as way to get into the hydrogen fuel cell business, but sources told Zero Hedge that Kingold was more interested in large tracks of industrial land that came with the deal.

Links:

(1) Zero Hedge Report

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