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How to Do a Gold Fraud With Style

The last month's uptick in the bullion price has been variously ascribed to worries about Iraq, Syria, Egypt, Ukraine, China, Bombay (where the gold-heavy marriage season is about to begin), or  Woking, where it probably isn't. There are dark rumours that one hedge fund manager went out and bought half a billion dollars' worth of bullion futures, possibly fearing for the worst if the Isis jihadists should get their hands on Iraq's oil pipelines, but the plain truth is that nobody has the foggiest idea.

Is that such a surprise? Given that gold, the world's premier bearer currency, is ironically so very hard to pin down to any particular person's bank vault? It's the sheer opacity of the thing that has always fascinated. Well, that and the scope it gives the most unscrupulous villains for a quick in-and-out before the rest of us have had time to wake up and wonder where the smell of the coffee went.

We have yet to see the last of the bitcoin frauds, I suspect, but it's always a good moment to reflect on Mark Twain's observation that a mine is a hole in the ground with a liar standing at the top. And to recall a memento mori  from the 1990s that both entranced and horrified the world. Although, in this case, the certainty of the death seemed somewhat compromised.


It was in October 1995 that a Canadian penny share company called Bre-X went stratospheric after announcing that independent tests on its Busang mining concession in Indonesia had indicated gold deposits of up to 70 million ounces. Seven months later its shares peaked at C$ 286, giving it a market cap of US$ 6 billion in today’s money. And no less a company than Placer Dome was trying to buy it.

It was inevitable, with hindsight, that the downhill trajectory should have started straight away. Chemical studies by the mine operator quickly showed that Bre-X’s samples had been (ahem) ‘salted’ by somebody with a bag of gold dust – some of which had apparently been made from ground-up jewellery. (9 carat, perhaps?) At which point the chief protagonist, a certain Michael de Guzman, accidentally fell out of a helicopter into a jungle while the pilot wasn't looking – leaving a corpse that was conveniently identifiable only by a few teeth and a stray thumbprint. Hmmmmm….

But not before the company's records had been mysteriously destroyed in a fire and the Toronto Stock Exchange had gone into shock. The fraud and insider trading prosecutions duly started, but the only living suspect, Guzman's sidekick John Felderhof, was swiftly acquitted by an Indonesian government that was none too keen to draw attention to the fact that it had also considered investing in the fraudulent project. The Bre-X scandal prompted a belated tightening of Canada’s mining company supervision, but for many pension funds it was already too late. Aaaah, they don’t make frauds like that any more. Thank goodness.

And as for Guzman? Canadian researchers are still working on the theory that he's holed up somewhere in the region, still living off the proceeds of a $100 million Bre-X stake that he and his colleagues had sold off before the scandal broke. But naah, that would be too improbable to be true, wouldn't it?

Next week we'll take a look at the Bunker Hunt brothers, and the biggest attempted silver price manipulation in history. Watch this space.

 

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