Will gold fever continue, and how secure are client investments in gold?

By year-end, precious metals mutual funds had gained 41.56% for 2010, compared with more than 29% for the two leading gold exchange-traded funds. Nevertheless, both fund categories, which typically invest in gold, hammered the 15.06% return of the S&P 500 index. By year-end, gold bullion vending machines had debuted in shopping malls!

Raising eyebrows was the fact that recycled gold, which includes melted-down jewelry, has been setting historic records. The gold supply from recycled gold rose 41% in the third quarter of 2010 above year-earlier levels, reports the World Gold Council, New York, the gold industry's market development organization and sponsor of the largest exchange-traded fund, SPDR Gold Trust (GLD). Mine production of gold over the same period rose just 3%.

Nobody seems to know whether mom's gold wedding band bought by Joe's pawnshop is finding its way into gold bars, lodged in bank vaults. Rather, the gold standard used by the largest ETFs to ensure purity revolves around "London Good Delivery" bars. These are bars between 350 and 430 troy ounces that have been produced to specifications of weight, fineness and dimensions set by the London Bullion Market Association, a trade association. Only LBMA-accredited refiners can manufacture these bars. If an LBMA investigation turns up a justified complaint about a good delivery bar, LBMA would write to the refiner seeking "appropriate restitution to the customer."

One gold scam was so sophisticated it tricked some of Hong Kong's largest jewelers, the Financial Times reported in early December. Jewelers and pawnshops, so far, have turned up at least 2,000 ounces of fakes that had passed basic scrutiny. Other published reports indicate that gold-plated tungsten bars have shown up in China's Central Bank, in vaults in Hong Kong and Fort Knox and at a German LBMA gold refinery.

Michael White, a spokesman for the U.S. Mint, denies the report of fake gold bullion at Fort Knox. In fact, he says, you can track the nation's gold supply online at www.fms.treas.gov, and it is audited annually.

"There's been a controversy over the last couple of years whether gold bars are really gold or gold-plated tungsten," says James Turk, founder of the online gold trading and storing Web site, GoldMoney.com. "The only way you can [test it] is through ultrasound testing. Turk says he recently implemented such a system through GE Inspection Technologies, Billerica, Mass.

The leading gold exchange-traded funds-SPDR Gold Trust (GLD) and iShares Gold Trust (IAU)-disclose in their prospectuses that neither the trustee nor custodian independently confirm that their gold bars meet London Good Delivery standards. IAU goes so far as to say its custodian's review of the accuracy of the bar list "does not include any chemical or other tests designed to verify that the gold received does, in fact, meet the purity requirements referred to in the Trust agreement."

Gold investment, largely through gold bars and coins, represents an average of 34% of demand for gold, the World Gold Council says. Demand through ETFs has swelled to an average of 40% of investment demand over the past three years, dropping slightly to 32% in the year ending September 30.

While mutual fund gold mining stocks in 2010 were the darling performance-wise, investment companies also can hold gold bullion. Seven of 21 precious metals mutual funds hold gold bullion or legal tender gold coins, according to Morningstar Inc., Chicago. There are four funds that invest in the SPDR Gold Exchange Traded Fund or iShares.