Common Gold Scams to Avoid
There are many excellent precious metals retailers today that sell coin and bullion products to customers. As with any other type of business, however, there are some dealers that may not have their customer’s best interest at heart. Here we will discuss some common ways one may be taken advantage of when buying precious metals, and how to avoid them.
Scare tactics are often used by salespeople to solicit the sale of precious metals. Let’s look at an example: Because precious metals are dollar denominated commodities, the value of the dollar can and does impact prices of gold, silver and other precious metals. While understanding the precious metal/dollar relationship is important, the potential weakening of the dollar is often used to solicit sales of precious metals.
While a weaker dollar has the potential to drive precious metals prices considerably higher, the fact is that the dollar has been weakening for years. In fact, the value of the dollar has been strengthening in recent months, and looks poised to keep going higher-for the time being anyway. Is the dollar likely to collapse today, tomorrow, next week or next month? Not likely….
While over time this may prove to be important as competition over the world’s reserve currency increases, the fact is that right now the dollar does not appear to be in danger of losing its status. While a salesperson may attempt to use this scare tactic to get someone to “buy now,” one should not buy precious metals until they are comfortable doing so.
Telephone sales people will often use this and other scare tactics in order to solicit a sale now. Fear can be a very powerful emotion, but not should necessarily dictate one’s buying decision. If a salesperson or dealer says you must “do it now,” then they are likely more interested in making a sale than what is best for you.
The Sale of Numismatics
Another very common trap to avoid is being convinced that buying numismatic coins is in your best interest. Now, to be clear, some coin collectors and experienced investors may want to purchase numismatic coins, and there is nothing wrong with that. That being said, however, are numismatic coins the best fit for an investor looking to acquire gold, silver or other precious metals? The answer is usually no. Unscrupulous dealers may try to sell unknowing investors numismatic coins because these coins often carry significantly higher premiums than bullion coins. If you are simply looking to get as many ounces of gold or silver as you can and a dealer attempts to sell you numismatic or collectable coins, then that dealer is likely thinking of their own bottom line, not yours. They will even use tactics like telling someone that numismatics cannot be confiscated, or that they stand a better chance of making money on the investment. Whatever sales pitch you get, however, remember that if you want precious metals for portfolio diversification, as an inflation hedge, or for other standard reasons, then numismatics will not help you accomplish your goals. Always keep this in mind: Bullion coins are bought for their precious metals content, numismatics are bought for their scarcity and collectability. If you are an experienced coin collector and want to buy numismatic coins-great. If not, you are likely much better off buying bullion coins which give you exposure to gold or silver but do not carry the significant premiums of numismatics.
The Bait and Switch
An unscrupulous dealer may also employ classic bait and switch tactics. These dealers will reel unsuspecting investors in by offering low premium bullion coins or other products. They will then attempt to “up sell” the prospect into higher premium numismatic coins or other products that make more money for the dealer. Be mindful of such tactics, and stick to your guns. If you want exposure to precious metals, stick with the basics and do not allow yourself to be talked into buying anything else.
Leveraged Precious Metals Investments
Another common trap to avoid is buying precious metals using a leveraged product. Some dealers will attempt to get you to buy gold, silver or other precious metals using leverage. While leverage can magnify gains, it also equally magnifies losses. For the inexperienced investor, using leverage can potentially lead to devastating losses. In fact, losses can exceed one’s account value in which case more funds must be deposited. People have lost their homes and other assets by getting involved with such instruments and not knowing what they are doing. In addition, dealers may push these products because of the enormous fees involved. The dealer may charge fees for the account setup, transactions and interest on the margin balance. When you use leverage, you are effectively borrowing money-and that money must be repaid. The use of leveraged vehicles is best left to those who are highly experienced traders or investors and who truly understand the pros, cons and risks of such an investment-and are willing to assume that risk. For those looking to acquire precious metals and hold those metals, leveraged vehicles are almost always not appropriate.
While unfortunately the list of potential scams could go on and on, knowing what to look out for can help keep you clear from trouble. Look to work with dealers that act in your best interest, not their own. Do not be talked into buying products you do not understand, or that carry significantly high dealer premiums.