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About the basic Facts you Need to know when Trading Physical Gold Bullion

By : Ziad K. Abdelnour| 1 October 2013
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As part of Blackhawk’s close group of family and friends; and to set the record straight, I thought I’d share with you those important facts you need to know if you’re actively involved in trading Physical Gold Bullion.

Please do not take this information below as preaching, as it is a boiler plate but still is a helpful guide to this day for us and anyone else involved in this business.

The bullion bank officers we work with have all approved of our attempts to improve the understanding by brokers/traders of the actual workings of the international gold market. These attempts hopefully will reduce the time waste and expense of the great mass of invalid AU Offers and demands that enter the market each week. To that end we have prepared as per below several general commentaries.

Backward Proposal Demands

The Seller side initiates a proposal that attempts to be an Offer but fails to meet the definition of an Offer. In spite of these deficiencies their proposal demand that prospective respondents reply with a valid counter-offer. This “I want to sell to you, but before I identify myself to you, you must identify and prove yourself to me” is a non-starter. No valid Buyer will comply with such a backward out-of-sequence demand.

It is the proposing party’s responsibility to make a valid Offer. A valid Offer includes, at minimum, the full Seller identity, the full product specifications, warranties as to product quality, warranties as to clear transferable title, and the desired transaction terms and conditions. For gold held on deposit, the full product specifications must include the certificate or safekeeping receipt numbers.

Failure to Recognize Buyers’ Legal Responsibilities

A valid prospective Buyer respondent will verify the Seller’s bona fides and the certificate or safekeeping receipt numbers. This verification serves two purposes:

1) Determine if the buyer can legally transact with the Seller, and
2) Verify the provenance of gold offered. Only legally acquired gold presently held with clear and transferable title may be legally bought and sold. If these pre-conditions are met, a valid Buyer may elect to respond. Absent these pre-conditions, there will be no response.

The provenance, that is how the gold was acquired and its chain of custody, is of greater importance than the gold’s assay as later proven. This means that all gold offered for sale has a history. That history must be verified and found genuine and legally acceptable. A failure to conduct this preliminary due diligence is not only irrational and a violation of buyers’ policy and procedures, it is also illegal. The various international and national anti-terrorism, anti-money laundering, anti-fraud, and banking laws and regulations all demand that Buyers actively validate the Seller’s background as a condition precedent to transactions. In practice, they are preconditions to entering into negotiations.

The only Buyers for the gold in the quantities some dealers purport to wish to sell are banks and perhaps some governments. None will comply with their demands in conflict with their legal responsibilities.

Unwarranted Reliance on Hallmarks and Misunderstanding of GLD

As I am sure you know, but just to refresh your memory, for buying and selling purposes there are only two kinds of gold, “Good London Delivery” qualified gold, and all other “said-to-be-gold.”

If your seller states that the gold has “internationally accepted hallmarks” and that it is “GLD.” There is no such thing as an internationally accepted hallmark. It is a internationally recognized hallmark. It is not the hallmark that is accepted. It is the chain of custody that is accepted.

For GLD gold, the chain of custody begins when the following steps are completed:

A GLD qualified refinery refines the metal to GLD 999.5+ standards that

1) is certified as 999.5+ by a master assayer, whose assay
2) is accepted by a GLD qualified depository (might be the refinery itself or a GLD bank depository) who
3) registers the bar serial numbers with the GLD registry taking
4) full faith and credit responsibility for the assay of and the clear title to the metal.

That is GLD gold. The GLD certifying entity, be it the GLD authorized refinery or the GLD authorized bank depository, impresses its hallmark and serial numbers into the bar to facilitate inventory control. There is no value in the hallmark. All value resides in the GLD authorized depository’s certification. Saying that the gold has “internationally accepted hallmarks” says nothing as to provenance and says nothing that can be relied on as to the material’s current true assay.

All reliance is placed on the chain of custody, not on the hallmark of the GLD originator. If the chain of custody is such that the present custodian is a GLD authorized depository that certifies in the present instant and circumstances with responsibility to its full faith and credit that the gold is at present GLD, then the gold remains GLD. In any other circumstance the gold is no longer GLD.

GLD gold is gold that the Buyer has an affirmative warranty from the immediately preceding GLD authorized depository. If, in the very rare circumstance that the GLD certified gold turns out to be adulterated, then the present owner is compensated to the full faith and credit of the immediately previous GLD certifying custodian. That custodian may have a reversionary claim against prior GLD custodians IF the last certifying custodian can prove that the adulteration occurred while in a specific prior GLD custodian’s possession. In all cases the Buyer looks to the GLD certifying entity for protection, not to the gold itself, or to the party whose hallmark appears.

Hallmarks can be easily forged. Gold can be adulterated after being hallmarked. The GLD certifying entity’s full faith and credit responsibility is the source of reliance, not the hallmark.

All non-GLD gold is “said-to-be-gold”, hallmarks notwithstanding. All non-GLD gold must be re-refined to prove the metal. The bullion banks buy only proven gold, either proven by re-refining and assay, or by the full faith and credit of the immediately precedent GLD authorized certifier.

Failure to Recognize Market Realities—Buyers

At the levels of offers we see, only banks or governments are Buyers. There are many more Sellers than bank or government Buyers. Banks and government Buyers can buy at any time in any amount. A purchase by them is merely a reclassification on their balance sheet from “Currency on hand” to “Gold on hand.” They are not motivated to purchase. They are not motivated to sell. Banks rarely buy or sale on their own volition. What banks do is make a market. They stand ready to buy or sell as their customers may wish. They will do so for properly validated customers, requesting to transact in legally owned clear title gold, taxes paid, all in accordance with bank policy, law and regulation, if the transaction brings an adequate profit to the bank. Otherwise, no deal.

All valid gold transaction Offers will eventually land at the banks’ doorsteps. They can and will wait for valid transactions. They will not, and are prohibited by law, regulation, policy, and long-standing tradition from chasing deals as you demand.

Failure to Recognize Market Realities—Sellers

Most “Sellers” of gold are not Sellers of gold. Under international law a Seller who offers to sell a product not already in his possession and control with free, clear, and transferable title, such that the product may be immediately transacted for its intended purpose IS COMMITING A FRAUD. Most purported sales Offers are fraudulent. A plain and simple tipoff is a demand that the Buyer prove himself first. This is a direct indication that the “Seller” does not have the gold to sell. Instead the “Seller” wants to use the Buyer’s purchase commitment to buy the gold from someone else. These attempts are illegal and are actively avoided by all valid Buyers.

Failure to Recognize Market Realities—Irregular Transaction Attempts

Many brokers and many of their purported “Sellers” complain about the many invalid “Buyers” out there. There are no invalid Buyers for large gold transactions. There are valid Buyers (banks and governments). And there are people who attempt but who will fail to be Buyers. These “fail-Buyers” are those that accede to demands such as included in your incomplete proposal. A “fail-Buyer” attempts to buy with the purchase product collateralizing the purchase price. This does not work. It is a rare bank (and a dumb bank) that will accept non-GLD gold as collateral to support a purchase. The “fail-Buyer” will eventually fail to obtain purchase financing and the deal will fall through.

Bottom Line:

If you want to sell gold, then please have your seller conform to law and market realities.

The first step is to make a legally valid Offer….Hence, the standard procedures we follow and as delineated below:

1. Seller issues signed Full Corporate Offer (FCO).
2. Buyer returns signed Letter of Intent (LOI) indicating acceptance.
3. Seller issues/delivers to Buyer a signed Purchase and Sale Agreement;
4. Seller supplies to Buyer evidence of legal ownership, current Assay Report, bank statement.
5. Seller provides a letter from their bank indicating that the Seller is ready to commence the contract and that the Bank is ready to transact with full bank responsibility.
6. On successful verification of the documentation identified in clause (d) the Buyer will arrange an acceptable institutional Payment Guarantee for the full contract value as instructed by the Seller.
7. Buyer and Seller lodge contracts with their respective banks.
8. Seller’s bank will SWIFT to Buyer’s bank confirming the existence and transferability of merchandise;
9. Buyer’s bank will respond by SWIFT with confirmation of payment;
10. Transaction is completed electronically with exchange of AU and Funds on a bank-to-bank basis.

NOTE: Bank-to-bank could be substituted with ledger-to-ledger as the terms of the contract may require.

We look forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. YusufYusuf

    Dear Sir/Madam,
    WE FIND YOUR BLOG EXPLAINING THE FACTS ABOUT TRADING PHYSICAL GOLD BULLION VERY
    USEFUL AND THESE GUIDELINES CAN CERTANLY HELP ALL BUYERS,SOURCING AGENTS AND SELLERS
    AS WELL. THANKYOU FOR SHAREING AND HELPING US ENHANCING OUR PROFESSIONAL KNOWLEDGE.
    BEST REGARDS,
    YUSUF NOORANI
    CEO.YAN ASSOCIATES
    REGD.COMPANY

    OUR BREIF INTRO:
    We are a Regostered Company name YAN ASSOCIATES.
    We are Sourcing agents, exporters,traders beside our Consultancy services to our
    Buyers and Sellers in the international markets.
    We deal in Gold Bullion,Dore Bars, Raw Gold, Gold Ingots, Silver etc.,
    We also deal in minerals like iron ore, Copper ore, Chromite, agri and petrolium products.
    *****

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