by | Nov 20, 2019 | Precious Metals

Last Updated: November 20, 2019

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With a bullish precious metals market, the price of gold and silver has risen exponentially. There’s no better time than now to invest in precious metals, yet one must be mindful of nefarious players whose sole aim is to defraud innocent investors. When it comes to precious metals investing, here are 5 scams to avoid.

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Precious Metals Futures Investment Scam

 Because of the rising prices in precious metals like gold, silver, and fraudsters have become increasingly brazen in their attempts to dupe investors. It has become so problematic, that the US Commodity Futures Trading Commission (CFTC) has issued precious metals fraud advisories.

According to the CFTC, there are several signs that a precious metals sales pitch could potentially be a scam. Based on previous incidents, be wary of individuals who contact you requesting personal information including name, address, and email. Often individuals who claim to be “metal dealers” or “merchants” make the sales pitch. Another aspect of this scam is that a call is received from a broker or salesperson claiming to be from a reputable company to promote a precious metals purchase. In this case, fraudsters attempt to build credibility by indicating they have special credentials and experience. Another tactic used by fraudsters the CFTC cites is creating a sense of urgency, by claiming there is a limited supply of the precious metal. Moreover, they attempt to convey that savvy investors have already invested.

There are several frequent problems that victims of this scam have encountered. The principle issue is that the fraudulent firm losses all or a significant portion of the money invested, with the investing not seeing any of the promised profits. Additionally, these scammers often pay themselves sizeable commissions from investor funds, leaving little remaining. Another common occurrence documented by the CFTC is that these fraudulent companies never actually arrange for loan financing as promised from an independent financial institution, but charge fake interest on the “loan”.

Some of the warning signs outlined by the CFTC that investors should be aware of include: an agreement that doesn’t outline which financial institution will be providing the loans, difficulty verifying a respective firm’s license, or an agreement that doesn’t identify where the physical precious metal is located. The main takeaway, never permit yourself to be manipulated into taking out a loan for the future price of any precious metal.

(Posthumously issued coin of Alexander the Great from Temnos. Dates c 188-170 BCE/Wikipedia)

The Question Of Numismatic Coins

 Many individuals who want to invest in precious metals, do so by buying gold or silver bullion coins or bars. The inherent value of the precious metal remains the same, irrespective of the form that it takes. However, numismatic coins differ in that they are valuable or rare coins that possess a higher external value than the base value of the metal in question. While the spot price of a precious metal impacts the value of bullion coins, numismatic coins have the potential to appreciate despite the state of the markets. Basically, their value is affected by external factors such as collector demand et al.

That said, for experienced collectors and investors, numismatic coins can prove to be a profitable endeavor. However, for the average investor looking to diversify a portfolio with precious metals, numismatic coins are not the answer. Fraudulent coin dealers may attempt to sell these sorts of coins to unwitting investors, by highlighting the substantially higher premiums.

Yet, as with any investment, there are no guarantees. It’s important to remember that bullion coins are purchased for their precious metal content, while numismatic coins are purchased for their collectability. The rare coin market is a wholly different beast, that warrants significant research and due diligence, especially since each coin is different. Moreover, there isn’t the same liquidity as with the bullion market.

The Numismatic Coin Bait and Switch Scam

The numismatic coin bait and switch is perhaps one of the oldest scams in the precious metals sector. Many unscrupulous companies advertise a secure precious metals IRA with actual bullion, or other products. These companies then up-sell products to unsuspecting investors, making offers on the likes of numismatic coins that will ultimately make the fraudsters significant profit.

Always bear in mind, if you are new to precious metals investing, stick to the basics to grow your investment, and be wary of untrustworthy dealers or salespeople.

(The Proof version on the 2006 American Buffalo gold bullion coin/Wikipedia)

Purchasing Proofs Rather Than Real Bullion

 When it comes to the precious metals sales industry, there is no regulation. That said, investors should do significant research on all options before making any purchasing and investment decisions. With regards to coins, the US Mint produces two types: “proof” bullion coins, and uncirculated bullion coins.

In essence, proof bullion coins are minted for collectors, while uncirculated bullion coins are minted for investment purposes. They’re sold to a specific number coin dealers, brokerage firms, and major banks. Although both types of coin contain the identical amount of a given precious metal such as silver or gold, proof coins are far more expensive, because they are considered to be “semi-numismatic”. Many inexperienced precious metals investors make the mistake of buying proofs, rather than real bullion.

Scare Tactic Scam

Telephone salespeople are most notorious for employing this sort of scam. Essentially, they use scare tactics to force inexperienced investors into investing in precious metals. The price of the dollar does influence the price of precious metals like gold and silver. Unscrupulous salespeople often use the potential for a weaker dollar as a means of soliciting precious metals sales. Investors should never feel pressured into investing in precious metals.

Always be extremely skeptical of any unsolicited phone calls from offshore firms or salespeople attempting to sell precious metals products.

How Investors Can Prevent Being Scammed

Unfortunately, scams are prevalent in the precious metals sector. However, there are a few things beginner investors can do to ensure that they are making safe investment choices when it comes to precious metals investing. Firstly, do your research and due diligence. This is a good rule of thumb for investing in any capacity. Also, inquire about all fees and commissions. It’s advisable to only deal with a reputable precious metals dealer that won’t charge unfair fees, premiums, or commissions. Be suspect of any company advertising bold guarantees of high profits with no financial risk.

Ensure that the dealer you choose works with a reputable custodian. Dealers should be open about the IRA custodian they deal with, as this is the company that holds your account.

Make sure to know where the precious metals are being held and stored. It is also vital to know whether they are 100% insured. Also, be aware of storage fees.

Another important piece of information beginning investors should be aware of, is whether or not the dealer of choice will purchase back the precious metals. This is often the singular difference betwixt reputable and fraudulent companies. That said, a dealer may offer to buy back the precious metals, but at a significantly reduced price, thus resulting in the investor losing money. It is important to understand the dealer’s stance on the matter of buy-back.

It is crucial to ensure that the products you will purchase are precious metals allowed in an IRA. It’s good to know the Gold IRA rules and regulations.

Before finalizing any sale, seek out expert confirmation from the likes of the CFTC, or other consumer protection authorities like the Better Business Bureau for company profiles.

Investing in Precious Metals

Considering that the price of precious metals like gold and silver are on an upward trajectory, there’s no better time than now to invest. For US investors interested in investing through a retirement account such as 401k or IRA, take a look at our precious metals IRA reviews or top Gold IRA companies for more information on the companies involved in this space and how they compare.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.