They may have never even noticed if bank officials hadn't tried to sell the bars when South Africa was actually buying gold bullion in early 2008. Very high gold prices, pushing $1,000 per ounce, encouraged the perennially cash-strapped nation in North-eastern Africa to try and raise some money. What should have been a sound gold bullion investment turned into a financial nightmare and an international scandal eventually involving Interpol.

But, the question remains: if gold is over twice as dense and steel, why didn't any one notice when they were physically put in the vault? If it was your job to purchase bullion bars, wouldn't you pick a few up to check? And why didn't the thieves bother doing a better job of making forgeries?

Apparently no one did, or the wide-ranging conspiracy involved switching the contents of the vault over the course of a month or two. Nigerian nationals living in Ethiopia were responsible for conducting the transactions when the state decided to invest in buying gold bullion from what turned out to be less than reputable sources. In fact when police raided the home of the ringleader (after he had fled the country, of course), they found tens of millions of Ethiopian Birr in several different currencies.

Among the officials indicted in the incident were several officials of Ministry of Mines and Energy who were supposed to have assured Bank officials that the bars were, in fact real, when settling on buying gold bullion from such an “unusual” source. In what amounts to an act of treason for those arrested, officials from the bank, chemists and geologists were also arrested when the story broke.

In all, there were nearly 595kg (nearly 20,000 ounces) of what was thought to be 24k gold bars until the fraud was discovered. In the end, 26 people were brought to face charges of fraud and treason. The bars in question were the 400-ounce (just over 33 pounds) London Good Delivery Bar – what should be an industry standard allowing gold to be sold anywhere in the world, pretty much anytime.

The development was a result of changes made to the way that the Bank of Ethiopia decided to invest in gold bullion bars in 2005. It went from being the only authority in the country that could export gold bars to appointing official agents to handle the job for them. As such, if there had ever been real gold bars, they were gone, likely to other nations. The officials tasked with checking and buying gold bullion for the bank had clearly been bribed to look the other way and to not test the bars in question.

This story does raise another, perhaps more important question to other banks and mints in the world. When they buy bullion, do they check it? Just because the thieves in this case were sloppy enough to use poor quality fakes, it is possible to make a high-quality fake bar that is indistinguishable by feel. Have the gold reserves of the world, many of which actually back billions of dollars in electronically traded fund (ETF) investments, ever been checked for purity beyond a simple scratch test?

The answer is most likely, “no,” and that's a sobering proposition.

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Arthur McGuire

April 4, 2009