Don’t Get Scammed When Buying Gold
With gold prices on the rise, so too are the number of creeps lurking out there that are to trying to make a not-so-honest buck. Here are a few common scams that occur most frequently in the precious metal investment industry, as well as a few tips on how to avoid them.
#1 GRADING COINS
In the world of coin collecting, the Holy Grail is an old coin that has never been handled or scratched. Investors would call this MS-70 or “mint state” coin. This means that after the coin was struck, it went directly into someone’s safe or otherwise where it was never subjected to wear and tear like a normal coin in circulation.
In order for a coin to be rated a perfect specimen, it cannot show a single scratch or flaw under as much as 5X magnification. An unsuspecting investor may either take the sellers word for it, accept a phony “certificate of authenticity”, or have the seller’s cousin Vinny (who just so happens to be a antique appraiser) verify that the coin is perfect.
A coin that can rightly claim flawlessness can be worth hundreds of dollars more than one with a scratch, even if it’s undetectable with the naked eye. An investor might not be able to tell the difference and could be duped into paying more than the coin is actually worth. A smart investor will get the coins graded and checked with an independent third party (someone they chose and is in no way affiliated with the seller). A reputable dealer will stand by his product and welcome a third party appraiser. Remember, dealers have appraisers protecting their side of the bargain, and so should the buyer!
#2 BUT IT LOOKS TOO NICE!
Be cautious of dealers that sell coins in “slabs”, ornamental plaques, or layers of plastic packaging that prevents the buyer from physically inspecting the coin itself. Some shady dealers like to place inferior products in fancy display cases making it very difficult to actually inspect the coin. Buyers could be conned into the previously mentioned scam (in #1) or worse, the coin could be a fake. Never buy collectors item coins sold in a sealed plaque or case. Any serious investor should demand quality, aesthetics is purely secondary.
#3 GET RICH QUICK & THE SALOMON INDEX
Gold is a tried-and-true method of hedging against inflation and currency devaluation. In most cases, it is not a way of getting rich quick. Be aware of the Salomon Brothers index which was formerly compiled by the New York investment bank, Salomon Brothers. This index promises a 12%-25% a year return on your investment using a complicated math formula.
This formula may be valid, but only for the coins it was written about – which were 20 very rare collector’s items. A common coin like the Canadian maple leaf or the American gold eagle that can be picked up virtually at any gold dealer will not appreciate at the same rate. A prude investor will have realistic expectations about returns and will never allow themselves to be pressured into some shady get-rich-quick scheme. Remember the old adage: “if it sounds too good to be true, it probably is”.
#4 STORAGE SCHEMES
Some unsavory dealers have been known to sell fake coins or bullion, while others sell that which never existed in the first place. There are documented cases of dealers actually selling gold bullion and coins to investors and then offering a storage service to hold that gold for a fee. Many gold investors have legitimate concerns about security. Where to store it? What if someone steals it? These “friendly” dealers remove that fear by storing it an escrow or facility on the buyer’s behalf. The buyer ends up paying thousands of dollars for the gold as well as a monthly storage fee for something that never existed in the first place.
A gold investor simply must take physical possession of their collection. A certified storage facility can be a good idea for large collections, but it should be one that the investor can physically deposit and withdraw from at any given moment. Preferably it should be nearby in case of emergency. One ounce gold bullion or coins are small and several can be hidden inconspicuously almost anywhere in one’s house. But large-scale collectors should consider proper storage and it’s costs as just part of their investment.
#5 EXECUTIVE ORDERS
The largest scale gold scam ever made was actually executed by an unlikely source – the US government.
In 1933, shortly after Franklin Roosevelt took office he signed executive order number 6102 into law. The law made it illegal to “hoard” gold in “excessive” amounts (at that time anything over $100 was seen as excessive). The law’s intention was to prevent citizens from using anything but paper money during the height of the great depression.
Since the dollar’s value had plummeted people would use alternative and more stable currencies, like gold coins. This law facilitated a massive seizure of private gold assets from bank safe deposit boxes. Some who owed large bullion collections were able to ship them to other countries, like Switzerland for safe keeping. But most were forced to accept the market value of $20.67 (in paper money) per ounce the government offered in exchange for their “excessive” gold.
After confiscating all the gold owned by its citizens, the government immediately revalued the dollar relative to the gold and declared that gold was now worth $35 an ounce.In a single swipe of a pen, the government robbed millions of American citizens.
Don’t keep all your eggs in one basket!
Frankly, there is no guarantee that another depression couldn’t happen again. The recent downgrade of Greece’s sovereign debt and now a possible default is a very real threat to the same happening in the US. The very fact that it has happened before should make any investor nervous. Since gold is used to hedge and protect against inflation and devaluation of currencies, investors must be ready and plan for any situation. Think twice about keeping your gold in a bank deposit box.
Investors must protect themselves when making any purchase, and the best way to do that is to do your homework. Starting with dealers that are approved by industry trade groups will go a long way in weeding out most corrupt dealers. Two leading trade groups in the industry are The Industry Council for Tangible Assets and The Professional Numismatics Guild, which are both great registries to consult with.
Remember that every investment comes with some risk, and most of that risk can be avoided by simply doing your part to educate yourself.