Don't Fall for Precious Metals Scams

With gold and silver prices moving higher in the wake of Middle East tensions, investors need to tread cautiously. Not only do they have to carefully pick their entry point, they have to make sure they don't fall for scam artists who -- in the words of the Federal Trade Commission (FTC) -- are "putting a new twist on an old scam."

The FTC has warned that scam artists are touting coins and precious metals as low-risk, high-yield investments to hedge against the economic downturn and fears of a declining U.S. dollar. 

(Read more about scams).

Since the 1980s, the commission has brought dozens of cases against fraudulent marketers that hawked gold or silver bullion, rare coins, precious and semi-precious metals, gemstones, oil and gas leases, and fine art as a safe alternative to traditional investments such as stocks and bonds.

Over the past three decades, the FTC has brought 17 cases against companies that sold overpriced and/or misgraded historic coins for investment purposes. While the companies allegedly falsely marketed their coins as good, safe investments, in reality, these dealers sold them with significant mark-ups, often as high as three-times the prevailing market price.

In testimony before Congress last year, the FTC said it has identified three main types of recent complaints related to the sale of coins and precious metals - those involving deceptive sales pitches for investments in historic coins, reports of unscrupulous marketers pitching highly leveraged precious metal purchases with the promise that the investments are "safe" or "low-risk," and those regarding "cash for gold" offers where marketers fail to provide consumers with a quote of the value of their precious metal and jewelry before melting it down.

Investigate Before You Invest

Investing in bullion or bullion coins is a big decision. If you're thinking about it, the FTC offers this advice:

• Ask for the coin's melt value. The melt value for virtually all bullion coins and collectible coins is widely available.
• Consult with a reputable financial advisor you trust who has specialized investment knowledge. You may want to talk to other investors, too.
• Shop around. Most banks offer gold bullion -- often at a lower markup than dealers. You also can enter the name of the coin into an online search engine to compare prices from other dealers.
• Get an independent appraisal of the specific asset you're considering. The seller's appraisal might be inflated.
• Consider additional costs associated with the investment. You may need to buy insurance or a safe deposit box, or you may need to rent offsite storage to safeguard your bullion. These costs will cut into the investment potential of bullion.
• Walk away from sales pitches that minimize risk and sales representatives who claim that written risk disclosures are just formalities required by the government, and therefore not necessary. Reputable sales reps are upfront about the risk of particular investments.
• Refuse to "act now," regardless of the consequences. Any sales pitch that urges you to buy immediately is a signal to walk away and keep your money in your pocket.
• Check out the company by entering its name in a search engine online. Read whether other people have something to say about their experiences with the company. Try to communicate offline if possible to clarify any details. In addition, contact your state Attorney General and local consumer protection agency. Checking with these organizations in the communities where promoters are located is a good idea, but realize that it isn't fool-proof: it just may be too soon for someone to realize they've been defrauded or to have lodged a complaint with the authorities.
• Ask for a guarantee or certificate of authenticity for the bullion's precious metal content. Research the company behind the guarantee or certificate because certificates of 'authenticity' can be faked.

Tip-offs to Rip-offs

Bullion scams often involve false claim about content, rarity or value. Unscrupulous sellers often overprice their coins, lie about the bullion content, or try to pass off ordinary bullion coins as rare collectible coins.

Some fraudulent dealers may even try to sell coins that aren't bullion coins at all. Others may try to sell bullion pieces with the same design as coins from the U.S. Mint, but in different sizes. Indeed, private mints issue coins that look like bullion coins minted by foreign governments, but may have little or no gold content. Your best defense is to study the market and choose your dealer carefully.

Unscrupulous dealers may also urge you to invest in precious metals with the false claim that the value of a particular precious metal is about to skyrocket, or that current political and economic conditions indicate that the value of "hard assets" like gold or silver are poised for dramatic increases.

These sellers may say that you need to act fast or miss out on a low-risk, high-yield investment. What they don't mention is that you're about to enter into a leveraged purchase, which works like this: you pay a fraction of the purchase price of the bullion, say 20 percent, and a lender pays the balance. The lender holds the precious metals you "bought" as collateral for the loan.

An unscrupulous seller also may charge big fees and commissions that could wipe out your initial investment. If the value of the precious metal you "bought" drops below a margin set by the lender, you may be subject to an equity call because the value of your metal is no longer enough to secure the loan.

At that point, you have to decide whether to put more money into the investment or tell the lender to sell the metal to pay off the loan. Either way, it's very likely you'll lose some or all of your investment.