With gold prices rising thanks to the economic and market chaos, the shiny yellow metal’s profit potential is drawing some unscrupulous gold scam artists out of the woodwork.
Here are five of the most common and most damaging gold scams out there right now — plus 3 safe ways to invest in gold.
Gold Scam 1: Grading Games
The Coin Con: In gold coins, MS-70 is the top of the heap — a “mint state” coin that has never been handled. But what’s an easier way to increase the value of a coin than to lie about the condition? For instance, a 2002-W $50 Gold Eagle is worth $1,915 at a grade of MS-63 — a very clean condition, but not perfect. MS-70 for the same coin tallies a tag of $2,850. Unsuspecting coin buyers might not be able to tell the difference, thereby overpaying by hundreds of dollars.
Solution: Check the grades of coins with an independent source before buying. A reputable dealer will stand by his product and welcome a third-party appraisal. Just make sure that third party is of your choosing and not a rubber stamp on the dealer’s payroll.
Gold Scam 2: Pretty Packages
The Coin Con: Be very cautious about grading certificates and “slabs” or other ornamental holders that prevent you from examining the actual coin itself. Some disreputable dealers like to put inferior products on fancy plaques or behind layers of plastic to prevent you from inspecting the piece. You could fall prey to the aforementioned grading scam this way, or worse, buy a coin that is a gold-copper alloy but looks pure in its protective casing.
Solution: Never buy collectors’ items or gold coins in pretty packages. If you’re decorating a room, it can be excused, but no serious investor/collector cares whether his gold coins are displayed in a pleasing matter. Quality and value matter more.
Gold Scam 3: Skewed Salomon Index
The Coin Con: If you want to buy gold as a hedge against inflation or to garner a decent return, that’s admirable. But beware of the Salomon Brothers Index quoted by dishonest dealers as proof that you will get rich quick. This annual index, formerly compiled by the New York investment bank Salomon Brothers, can show appreciation of 12% to 25% a year by a trick of math — but the reality is that the Salomon index was based on a list of 20 very rare coins. Gold eagles you get at the local coin shop are far more common and less likely to appreciate at the same rate.
Solution: Be realistic with your expectations and don’t get pressured into buying due to some get-rich-quick scheme. As the saying goes, “If it sounds too good to be true, it probably is.”
Gold Scam 4: Make-Believe Bullion
The Coin Con: Though it might seem hard to believe, some brazen dealers traffic not in counterfeit gold coins, but in coins that never existed in the first place. They prey off gold investors’ practical fear of holding a large amount of physical gold in their homes. What if a robber takes it all? Where can someone find the place to store a bulky coin collection? These “helpful” dealers offer to keep the coins in escrow to avoid such problems. Only, a far greater problem is that the gold coins never existed in the first place. And to top it off, these charlatans will actually charge you a storage fee for the gold they don’t possess.
Solution: If you’re getting into gold coins, you simply must take possession of them. There are risks and rewards to all manner of investments, and if you want to play physical gold, you have to understand that proper storage is part of that investment.
Gold Scam 5: Executive Order 6102
The Coin Con: Believe it or not, the most brazen gold con of all time was undertaken by Uncle Sam. Executive Order 6102 was signed on April 5, 1933, by President Franklin Roosevelt, “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. The result was a massive seizure of gold from safety deposit boxes. Some U.S. citizens who owned large amounts of gold had it transferred to countries such as Switzerland, but others were forced to take the $20.67 per ounce the government offered in exchange for the precious metal. So much for future appreciation.
Solution: Call me a conspiracy nut, but there’s no guarantee against a second Depression breaking out or U.S. sovereign debt avoiding a downgrade like the one Greece recently endured. So it’s in your best interest not to put your gold in a bank deposit. Again, if you truly want to hedge your risks and buy gold coins, you have to plan for everything.
So how can you invest in gold and be sure you’re not getting ripped off?
Well, doing your due diligence and relying on trade groups helps. The Industry Council for Tangible Assets and The Professional Numismatists Guild are two leading gold coin trade groups. Check with them for a list of members. You’ll always have to do your due diligence, depending on your specific purchases, but it’s easy to weed out a large swath of unsavory dealers by consulting these registries.
Remember, there are never guarantees, and it’s always buyer beware, whomever you choose as your gold dealer.
Now, here are three safe investment options that take the guesswork out of gold … and gold scams:
3 Safe Ways to Invest in Gold
#1 — Gold Bullion ETFs: If you prefer liquidity and fear possessing physical gold, ETF trusts that trade like stocks are good options. The iShares Gold Trust (NYSE:IAU) and the SPDR Gold Trust (NYSE:GLD) are two to consider. You will technically be investing in the “trust” and not the gold itself, so you could eat some of your profits in fees and expenses. But for many investors, that’s a small price to pay for easy liquidity and tight SEC oversight instead of examining coins on their own.
#2 — Gold Miner Stocks: Another relatively easy, but indirect way to invest in gold is through metal-related companies. This involves buying individual mining stocks such as AngloGold (NYSE:AU) or Kinross Gold (NYSE:KGC). Obviously this is not a pure play on gold so there is some wiggle room between bullion prices and stock prices. But these stocks also pay dividends that shouldn’t be overlooked and offer strict SEC oversight of your investment as opposed to the pawn shop free-for-all some gold buyers endure.
#3 — Gold Mutual Funds: These funds invest in a mix of gold bullion and mining stocks, providing diversification as well as the ability to play the upside of gold. Again, this is not a pure play on gold, but the liquidity, safety and oversight of mutual fund investments can protect investors new to the gold game.