I RECENTLY LEARNED that crooks like to use tungsten to defraud gold investors. Here’s how it works: Gold bars are typically validated by weight. If a standard size bar clocks in at the expected weight, it’s assumed to be pure. But tungsten, it turns out, has a very similar density to gold. Crooks will drill out a bar’s core, fill it with tungsten and then cover their tracks by applying a thin veneer of gold.
But there’s an easy way for gold experts to detect this fraud. Ultrasound machines, not very different from those used by obstetricians, can see through metal and spot bars that have been tampered with. In that way, the opportunity to commit fraud with gold—and other precious metals—is minimized.
One of the keys to success for investors, in my opinion, is to keep things simple—or, more specifically, to avoid complexity. A recent example: Earlier this year, a fund called Infinity Q Diversified Alpha ran into trouble. According to The Wall Street Journal, “Infinity held wide-ranging bets across stock, currency and derivatives markets, including over-the-counter positions.”
Those complex investments allowed room for the fund’s operators to engage in misbehavior. Quoting the Journal again, “Infinity appeared to have misvalued its large derivatives portfolio. Some of the valuations it disclosed were too high and, in one instance, mathematically impossible.”
Complexity, in other words, provided cover for dishonesty. That, in my view, was the root of the problem. Sure, there’s the potential for things to go wrong with any investment. But when a fund consists of an impenetrable stew like this, it’s that much harder to uncover malfeasance. The lesson for investors: Stick with investments that are straightforward, where a simple analysis could expose a problem. That way, you’re far less likely to end up with tungsten instead of gold.