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Lots of fake gold shows up in Hong Kong

Submitted by cpowell on 08:44AM ET Thursday, December 2, 2010. Section: Daily Dispatches
By Robert Cookson, Financial Times, London, Thursday, December 2, 2010

HONG KONG — Hong Kong goldsmiths have been sold hundreds of ounces of fake gold this year in one of the most sophisticated scams to hit the Chinese territory’s gold market in decades.

Industry executives say the scam — while not massive and hitting only the retail sector — uncloaks the increasingly elaborate gold swindles perpetrated by criminals in Asia as bullion prices soar to record highs of $1,400 a troy ounce.

The counterfeits have shocked Hong Kong’s gold community not because of the amount involved but because of their sophistication.

“It’s a very good fake,” said Haywood Cheung, president of the Chinese Gold & Silver Exchange Society, Hong Kong’s century-old gold exchange, highlighting how criminals are developing new techniques to commit an age-old fraud.

Mr Cheung said he was aware of at least 200 ounces — worth $280,000 — of the fake gold that had been discovered by jewellers and pawn shops. But he estimated that 10 times that amount might have infiltrated the retail market. In comparison, the large gold bars held by central banks weigh 400 ounces and are worth nearly $560,000 each.

In one case, executives discovered a pure gold coating that masked a complex alloy with similar properties to gold. The fake gold included a significant amount of bullion — about 51 per cent of the total — alloyed with seven other metals: osmium, iridium, ruthenium, copper, nickel, iron, and rhodium.

The complex nature of the fakes suggest they were produced by a metalsmith with sophisticated equipment and extensive knowledge of metallurgical engineering.

Even Luk Fook Group, one of Hong Kong’s biggest jewellers, was tricked into buying $11,500 worth of fake gold this summer before putting its stores on alert. “This was the biggest hit ever,” said Paul Law, executive director of the firm.

In the past, counterfeit gold in Hong Kong and the rest of Asia was either rough and easy to detect, even to the naked eye, or involved gold-plated tungsten, a metal with a similar density to gold, but which traders and jewellers can easily identify.

The complexity of the latest batch of fake gold would have reduced the profitability of the scam, since it used a significant amount of bullion, and because iridium and osmium are expensive.

In most cases, the fakes passed basic scrutiny, only to be revealed later by more sophisticated tests involving high temperatures and chemicals.

Industry executives stressed that the scam targeted the street-level sale of scrap gold to jewellers. Mr Cheung said none of the fake gold had infiltrated the much more bigger market for gold bars, which as is protected by more rigorous controls.

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