This guide analyzes risks from dealers, storage facilities, and other counterparties.
Dealer Fraud Risk
Common Fraud Schemes
Misrepresented Purity
- Lower purity: Sold as higher grade
- Price difference: 100-400% markup
- Detection: Difficult without testing
- Frequency: Common risk
Counterfeit Certificates
- Fake CoA documents: Created
- Lab signatures: Forged
- Authenticity: Appears real
- Loss potential: Total investment
Mixed Grade Deception
- High purity exterior: Apparent
- Lower purity interior: Hidden
- Surface testing: Passes verification
- Problem: Discovered later
Bait and Switch
- High purity promised: Initial
- Lower purity delivered: Actually
- Sealed packaging: Changes hidden
- Recourse: Limited
Fraud Detection Difficulty
Professional Appearance
- Websites: Professional
- Certificates: Authentic-looking
- Communication: Polished
- Deception: Convincing
Verification Challenge
- Testing cost: Significant
- Time required: Weeks
- Destructive testing: Ruins sample
- Cost-benefit: Sometimes unclear
Fraud Prevalence
Frequency Unknown
- Exact rates: Unmeasured
- Estimated: 10-25% of dealers?
- Speculation: Limited data
- Reality: Exists and significant
Dealer Reliability Risk
Business Failure
Dealer Collapse
- Business fails: Possible
- Capital loss: Total
- Recovery: Difficult
- Timeline: Long litigation
Causes
- Business mismanagement
- Fraud discovery: Forces closure
- Regulatory action: Shuts down
- Market changes: Operations unsustainable
Service Interruption
When You Need Service
- Dealer disappears: Leaves town
- Cannot access metal: In facility
- Communication: Ceases
- Resolution: Unclear
Storage Facility Risk
Facility Collapse
Storage Operator Failure
- Business fails: Insolvency
- Facility closes: Unexpectedly
- Access lost: Cannot retrieve
- Legal battles: Years needed
Why Happens
- Fraud by operator
- Mismanagement
- Theft discovered
- Regulatory closure
Fire/Theft Risk
Despite Security
- Fire: Still possible
- Theft: Can occur
- Sabotage: Possible
- Multiple catastrophes: Possible
Insurance Limitations
Gaps in Coverage
- Coverage limits: May be low
- Exclusions: Common
- Deductibles: Significant
- Claims: May be disputed
Bankruptcy Problem
- Insolvency: Covers nobody fully
- Creditor line: Forms
- Gallium holders: May get nothing
- Priority: Often last
Allocated vs Segregated Storage
Segregated Storage
Your Bars Identified
- Direct access: To your metal
- Clear separation: Your items
- Individual verification: Your metal checked
- Theft protection: Only your metal
Risks
- Commingling: Still possible
- Mislabeling: Can happen
- Operator fraud: Still risk
- Facility failure: Still affects you
Allocated/Pooled Storage
Commingled Storage
- Shared facility: With others
- Mixed storage: Your bars with others
- Individual ID: Hard to verify
- Withdrawal: Subject to delays
Risks
- Commingling default: All lose
- Theft: Affects all customers
- Preferential treatment: Possible
- Discrimination: Against some customers
Operational Risk
Physical Security Gaps
Despite Safeguards
- Inside help: Possible
- Corruption: Can occur
- System bypassing: Possible
- Theft: Despite security
Environmental Risk
Storage Conditions
- Temperature control: Failure possible
- Humidity: Can drift
- Contamination: Can occur
- Degradation: Possible
Inventory Discrepancies
Accounting Errors
- Miscounting: Happens
- Documentation: Can be wrong
- Verification: May not catch errors
- Losses: Gradual or sudden
Third-Party Verification Risk
Lab Testing Fraud
Fraudulent Certifications
- Lab bribery: Possible
- False tests: Can be created
- Undiscovered fraud: Difficult
- Verification: Need independent labs
Conflict of Interest
Lab Business Model
- Repeat customer: Wants satisfied
- Pressure: To provide results
- Incentive: To be lenient
- Bias: Possible
Insurance Limitations
What Insurance Covers
Standard Coverage
- Theft: Often covered
- Fire: Typically covered
- Natural disaster: Usually yes
- Loss: Most causes
Exclusions
- Fraud: May not cover
- Operator theft: Disputed
- Negligence: Often excluded
- War/terrorism: Typically excluded
Coverage Limits
Typical Issues
- Limit: Much less than value
- Multiple loss: Partial recovery
- Deductibles: Significant
- Claims: Often disputed
Example
- Facility holds: $100 million in gallium
- Insurance coverage: $10 million only
- Facility loss: $50 million
- Customers recover: $5-10 million
- Your share: If lucky, 5-10%
Chain of Custody Risk
Tracking Gaps
Documentation Loss
- Records missing: Can happen
- Chain broken: Unverifiable
- Ownership questions: Arise
- Legal disputes: Result
Handling Errors
Wrong Metal
- Mislabeling: Occurs
- Mixing: Mistakes happen
- Wrong metal delivered: Possible
- Verification: Too late
Geographic Risk
Regulatory Differences
Different Countries
- Consumer protection: Varies
- Storage regulation: Different
- Recourse: Depends on location
- Legal system: Affects recovery
Currency Risk
If Foreign
- Currency exchange: Affects value
- Repatriation: May be restricted
- Political risk: Varies
- Transfer: Complicated
Relationship Dependency
Single Dealer Exposure
All Business One Dealer
- If dealer fails: Lose everything
- No alternative: Available
- Switching: Expensive/difficult
- Concentration: Very risky
Single Facility Storage
All Metal One Place
- Facility failure: Lose all
- No diversification: Available
- Catastrophic loss: Possible
- Concentration: Very risky
Mitigation Strategies
Dealer Selection
Due Diligence
- History: Research thoroughly
- References: Check carefully
- Reputation: Verify independently
- Financial stability: Assess
Verification Protocol
Independent Testing
- All purchases: Test sample
- Random verification: Periodic
- Professional labs: Use independent
- Documentation: Maintain careful records
Storage Diversification
Multiple Facilities
- Don't concentrate: All in one
- Geographic spread: Different locations
- Different operators: Reduces correlation
- Risk reduction: Significant
Insurance Coverage
Adequate Insurance
- Full coverage: Aim for 100%
- Multiple policies: If needed
- Verification: Check coverage details
- Claims support: Document everything
Key Takeaways
- Fraud Risk Real - 10-25% estimated prevalence
- Dealer Failure - Can happen anytime
- Storage Risks - Fire, theft, negligence possible
- Insurance Limits - Often insufficient
- Commingling Risk - Affects all commingled customers
- Diversification Critical - Multiple dealers/facilities
- Verification Essential - Independent testing important
- Relationship Important - Choose counterparties carefully
Disclaimer
This analysis is educational. Counterparty risks are significant. No verification method guarantees against all fraud. Choose counterparties very carefully.