December 3rd, 2010
04:08 AM GMT
Hong Kong, China (CNN) – Alarm bells rang in Hong Kong's gold industry this week when it was discovered that several well-known jewelry stores were duped into buying fake gold.
Scammers always lurk about the precious metal, but these criminals seemed to go the extra mile. Normally, a jeweler will inspect scrap gold by literally scraping the gold and heating it. If the gold changes color, that's a red flag that it’s faux.
In this scam, the fake gold was a mixture of about 50% real gold bullion and 50% different alloys like copper, iron and rhodium. When jewelers heated the fake gold to test its authenticity, the color did not change.
"It may not be high-tech, but it is sophisticated, for sure," Haywood Cheung, President of the Chinese Gold & Silver Exchange Society, told me. Cheung added he does not know how the scammers were able to manipulate the alloys to keep its gold appearance under heat.
The fake gold nuggets and gold scraps looked real because it was coated with pure gold, Cheung said. Jewelers did not discover the fraud until the metal was melted down and irregularities appeared.
Cheung estimates jewelers lost about HK $2- 3 million (US$260,000-$387,000) because of the scam. As a result, local jewelers will take more skeptical look at gold brought in for resale. One extra measure could be cutting the metal in half for inspection, Cheung said – a process sellers typically don’t like.
How can consumers be sure gold objects they buy are real? Cheung says jewelers have identified the fake gold before sale, so jewelers do not risk their reputation by claiming the faux gold is real. "(The situation) affects the industry more than it affects the public for the moment. It does not affect the public because … the jewelers, the goldsmiths, will absorb the cost of the fake gold."
The demand for gold in China has been voracious. China imported four times more gold so far this year than last year.
Gold is traditionally a safe haven for investors and demand soars when there's uncertainty in global markets. Gold prices keep hitting record highs and hovered over $1400/ounce for the first time in early November.
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