If you are a broker, the first thing that might come to mind when you hear the term Due Diligence or DD for short, is a process that a buyer and seller go through to check up on each other and verify the existence of their prospective products or funds before a transaction goes through. While this does happen in most transactions, as brokers there is a certain amount of DD you need to be doing on every deal that winds up in your hands or inbox really.
As a broker, you need to try to source new deals everyday. You should have a very busy inbox. As you may know by now, most deals floating around on the internet are simply fake. There are many ways to spot these fake deals which we will go into later. The main point of this post is DD. You should always and I mean always, open up the document and read through every clause before sending it on to a perspective buyer/seller. Another important point is to have an idea of what your point of contact is looking for. You don’t want to waste the time of serious people, so be serious yourself. Do not go posting on LinkedIn advertising you have 250 million MT of gold available for sale as soon as it arrives in your inbox. Take some time to look at the offer and consider the good points and bad points before you send it to anyone much less post its existence in a public forum.
250 MILLION METRIC TONS OF GOLD?! REALLY?!
Let’s talk a little bit about how to spot fake deals. There are a few aspects of these transactions that you need to communicate to a buyer or the next person in your chain.
What is it?
How much is it?
How much is for sale?
Where is it?
What about the delivery?
What are the procedures?
The last question is usually the most important as we will go into later. Let’s tackle these questions one at a time.
“What is it?” – You need to communicate every aspect of this question that is possible. For gold, you have to know the purity, what kind of hallmark, how old the hallmark is(exactly how old), what form it is in(dust,dore,nuggets,bars,coins) and usually a buyer will want to know if they are in the GLD system. Some buyers do not care. For fuel products, buyers usually want a spec sheet for the fuel along with the offer. If one of these questions is unanswered in the offer you received, doing DD involves you asking your point of contact to provide the missing information. If the seller or your point of contact is unwilling to do this, that is a major red flag.
“How much is it?” – This is a simple and straight forward question. For gold it should be priced per Kg for dore, dust or nuggets. Bullion bars or coins will be priced according to LBMA or LME. Fuel is usually priced per barrel or per MT and against the PLATTS index or Brent. Gold bullion is usually expressed as a percentage off the appropriate index whereas fuel is usually expressed in a set dollar amount off. There will always be a gross/net discount. For instance, 5/4% discount for a gold transaction would mean there is 1% for the mandates and brokers to split.
Be careful when you see large discount splits over 4%. 14/8 discount is a major red flag. Also, watch the area that the discount is coming from. 12/8 or 12/9 discount is common for gold out of Hong Kong. To see that discount from a transaction originating in Europe would be a red flag.
“How much is for sale?” This is the question that usually puts up the red flag. Especially in Gold and Fuel deals. Unrealistically large numbers in this field are commonplace in deals floating around the internet and this is a major red flag. Don’t get me wrong, there is plenty of gold out there. However, the chances of you being involved in a transaction involving thousands of tonnes of gold that you found on the internet are very slim. Just stick to buying lotto tickets, you have better odds at getting rich with that.
“Where is it?” Make sure you find out both the origin and the current location of the product as they are both relevant and not always the same. This can make a big difference to some buyers who simply do not buy products from certain origins for one reason or another. This can also determine the cost of shipping depending on where it is and where it is going which brings us to the next question.
“What about the delivery?” – You really must familiarize yourself with a few shipping terms. The 2 most common terms are FOB and CIF. FOB meaning “Freight On Board” basically means the product is transported to whatever is the close port or airport from whatever warehouse it is sitting in and that’s it. The buyer is responsible for any shipping charges to its intended destination. CIF or “Cargo Insurance Freight” means that all the appropriate shipping and insurance charges are included in the price of the product. Another term you might see is ASWP which means “Any Safe World Port”. So a common phrase you might see is CIF ASWP or CIF buyer location, which means the seller will ship the product anywhere the buyer wants.
“What are the procedures?” – Procedures, procedures, procedures. This will make or break a deal. A major red flag here is the issue of POF or Proof of Funds. Buyers DO NOT show POF before seeing POP or Proof of Product. It just does not happen. Ever. If you see an offer that asks for POF as the first or one of the first steps, you should walk away as it is likely fake. If you are a new buyer then do not by any means show your POF to any of these people. What happens is they manipulate banks into loaning them money using your POF. Then they go and buy the product that was offered to you so they can actually sell it to you. These people don’t actually own the product on offer. The best you can hope for is offer them a JV and tell them they can still make plenty of money. This issue goes for both Gold and Fuel deals. Diamond deals are usually done at a Malca Amit facility and the buyer brings his own gemologist along with the money and/or bank officer and the seller brings his diamonds but again, buyers do not show POF before such a meeting takes place.
In closing I just want to say that DD is a very important part of being involved in a commodities transaction in any way. Whether you are a buyer, seller or broker, you have to do whatever DD you can on ever part and party involved with the transaction. After all, you only have one reputation. Ruin it and you will be ruined.