AUG 13, 2013
Investing in gold and silver may seem simple and straightforward, however it is not.
There are many types of ( quote, unquote ) "investments" in gold and silver you will want to avoid.
Gold and silver dealers are no different from any other industry or crowd of people.
Within our industry you will find many good honest professionals and organizations, but you will also find some bad outfits whose practices can be described as underhanded, even criminal.
Being the Managing Director of one of the world's largest gold and silver bullion dealerships, I have had the pleasure of speaking with and serving thousands of our clientele.
Through the years I have both researched and heard first hand accounts from some of our very own customers who had previously fallen prey to some unscrupulous precious metals dealers.
These folks learned the pitfalls in gold and silver investing the hard way.
You don't have to learn these lessons the hard way.
My goal in writing this article is to give you a short tutorial on the many gold and silver investing pitfalls out there, so you can avoid them right away.
Knowing what not to do when investing in gold and silver is just as important ( if not more important ) than knowing what to do.
First I will expose some tactics unscrupulous gold dealers use, then I will describe for you many of the products or investment vehicles you should avoid.
By the end of this report, you should also be able to perform some fast and easy steps of due diligence in order to quickly recognize the types of organizations you and your hard earned savings should steer clear of.
So let's begin by studying some of the crooked practices and tactics utilized to separate you from your hard earned savings.
Often in magazines, newspapers, and especially in internet display advertisements you will find promotions of bullion products at very competitive, low prices:
So?! What's wrong with that?
Many of the largest bait and switch shops utilize flashy, low product price, internet display advertisements to entice you to click on them. Ultimately these low price banner ads are aimed to retrieve your contact information in order to get you on the phone.
BAIT => Your phone number to a dishonest dealer is pure gold, and they will use numerous tactics to mine that information. For instance, many dishonest dealers run low cost bullion advertisement campaigns in order to get your contact information. If you were to click on many of these internet banner ads for instance, there will eventually be a squeeze page with a value proposition ( a free report of some sort ) asking for your phone number to complete the order.
SWITCH => You might then find yourself on the phone with a broker who at some point will try to persuade you to buy products ( for example: numismatic collector coins ) which are in their interest alone, not yours.
Numismatic, semi-numismatic, or collector coins supposedly have value in excess of their metal content because they are either historical, collectable, or rare.
As a gold and silver bullion dealer, people often expect us to carry numismatics coins - but we don't. Why? Because collector coins are a different investment than gold and silver bullion.
When you invest in a numismatic coin, you take a large risk because you move deeply into a hole as soon as you purchase the coin. If you don’t believe us, try buying and immediately selling a numismatic coin - you’re likely to lose anywhere between 30 to 50% of your investment capital.
Consider this: when you buy a numismatic coin you pay 3 different layers of costs... 1) the cost of the metal, 2) the dealer’s spread, and 3) the numismatic premium. The numismatic premium can range anywhere from a few bucks to a few hundred thousand dollars per coin.
Before you are “in the money” or your investment has returned a profit over its cost, the market price of your coin must have gone up more than enough to cover the numismatic premium. Until then, your collector coin will be a loser.
Over the years, gold and silver dealers have built a mythos around numismatic coins - as if they offer some mystical advantage to plain gold and silver bullion. Those myths have been created, not because numismatic coins are good for the buyer, but because most numismatic coins are good for the seller.
The biggest myth about numismatic coins is that the government can never confiscate them.
The 2nd biggest collector coin myth is that they do not have to be reported to the government.
Less-than-scrupulous precious metals dealers have made a living selling “non-confiscatable” and “non-reportable coins” that come with hefty numismatic premiums and price tags.
The “non-confiscatable” myth refers back to 1933, when U.S. President Franklin Delano Roosevelt ( in a misguided attempt to combat deflation and stabilize the U.S. dollar in the throes of the Great Depression ) signed into law an Executive Order 6102 that banned U.S. citizens from owning any gold. This Executive Order stated that if you didn’t exchange your gold for Federal Reserve notes, you could be sentenced for up to 10 years in prison ( by the way, not one U.S. citizen was convicted of hoarding their gold ).
Our research has shown that roughly 25% of privately held gold in 1933 was turned into various Federal Reserve banks ( this gold was melted down into 22k bar form and moved into Fort Knox helping to ensure the dollar’s viability as an internationally convertible gold standard currency ). The roughly remaining 75% of privately held gold coins were hoarded and not turned in.
Millions of these common pre-1933 gold coins are still being sold today, ironically being touted by many sellers as rare and unusual.
Let me repeat that. The exact same pre-1933 gold coins, the ones the government sought to acquire under Roosevelt’s Executive Order 6102 are being sold today as non-confiscatable and somehow being rare.
The only exception under Roosevelt’s order was collectible gold coins, rare or unusual, having “a recognized special value” to the owner. In other words, the only coins that were exempt in the 1933 gold nationalization were unreplaceable rare coins that belonged in a museum. Real rare and unusual numismatic coins can sell upwards of 100 times or more of their precious metals content.
That rare and unusual exception to the 1933 gold nationalization spawned myths that persist to this day. It is simply untrue that gold coins minted prior to 1933 are "non-reportable" and “non-confiscatable.”
By describing these old coins as non-reportable and non-confiscatable, the dealer implies to the customer that coins minted after 1933 are “reportable” to the government and “confiscatable” by the government.
Understandably, many inexperienced investors are spooked by those prospects and are persuaded to purchase heavy premium pre-1933 collectible coins - usually earning the dealer a nice, hefty profit.
Chances are high that great granddaddy’s hoarded $20 Saint Gaudens gold piece is neither rare nor unusual.
And chances are even higher that the large semi - numismatic coin dealers hounding your Internet browser, television, and radio are offering you products that are neither exceptional nor fairly priced.
Our suggestion is that unless you are an expert in numismatic coins, avoid them... their fundamental drivers are different from those that drive bullion. And during a financial crisis, when we want our wealth to be most protected, numismatic coins may leave you high and dry.
For more on why we avoid numismatic collector coins, click here.
If you find a popular spokesman endorsing a gold or silver dealer or if you learn about a gold or silver company through a Television or Radio Advertisement, chances are almost 100% that the company will pitch you products that you don't want to buy.
Be it through collector coins, leverage accounts, pools or certificates these firms would not be able to pay for their spokesman, football fields of broker salesmen, and expensive T.V. or Radio spots if they were not praying on unsuspecting inexperienced gold and silver investors.
This ABC Nightline video report can show you how many of these firms operate, click here.
You can also read about this 2012 class action lawsuit settlement for over $ 5 million, click here.
Some gold and silver outfits will try to use your excitement about a rising gold and silver price against you. Leverage accounts is one way these outfits may try to fleece you.
Leveraged investing is when you borrow currency in order to invest. In a traditional investment strategy, you might set aside a certain amount every month to be invested, so that the principal you had invested would grow over time, compounded by any earnings on the investment. With a leveraged investment, you would invest a large sum up-front, then make regular payments to pay back the amount you borrowed, plus the interest. The potential advantage of the leveraged investment is that there is a supposedly larger amount earning returns over a longer period of time. If the return on your investment is greater than the principal borrowed plus the interest, your leveraged investment has outperformed a traditional investment.
Leverage can dramatically increase your investment winnings, and leverage can be great for those who are educated in the proper techniques and are skilled in its use.
But if you don't know what you're doing (and sometimes even if you do), leverage can also magnify your losses to 100% and beyond.
It's this simple: when you introduce leverage… you introduce risk.
Leveraged investing is the realm of professionals who know no greed or fear; they just know the odds and the numbers, and they know how to eat the little guy for breakfast. You never know who's taking the other side of the bet. Many times you are going up against very "Deep Pocket" traders such as mutual funds and hedge funds. Either way, if you're not better than they are… you're dead.
In November 2010, the Los Angeles Times covered a story warning about retail gold and silver leverage account risks and the types of dealers who offer them.
Click here for A Cautionary Tale for Gold and Silver Buyers.
Former customers have also Created Blogs Warning Others.
It used to be when performing Due Diligence on gold and silver dealers, you could simply do a Better Business Bureau ( BBB ) investigation to make certain the prospective company was performing ethically.
Not so anymore ( click here to see this 20/20 investigation about how $420 got fake businesses A+ ratings ).
Checking the BBB rating of a business ( or in California the Business Consumer Alliance - BCA Rating) is not as important as investigating the volume and types of complaints a business receives.
By examining the volumes of complaints a company receives as well viewing the complaints themselves, you will get the best insight as to how a company handles discrepancies and what types of issues their customers may habitually run into.
Some filed complaints may seem minor, perhaps an undisclosed shipping charge of $20 or so.
While some grievances are much more egregious, where people's retirement or life savings remain in the balance.
For instance, below is a direct complaint from a company which displays low cost bullion bait and switch ads ( up-selling consumers into numismatics, collector and graded coins, etc ):
Run away from this company. When I bought my gold coins, gold was just a little over $1,000 per ounce. I purchased $25,000 in gold coins from this company through my IRA. Today gold is just over $1,700 per ounce. What are my gold coins worth according to my IRA? Only $20,000. How is that possible? XXXX Financial made a 100% markup on my coins. That's right, I paid double their value. These people are not honest brokers, they are salesmen. They aren't interested in honesty, ethics, or morals. They are interested in making as much money as they can from you, the novice and unsuspecting buyer. I was told it was a 3-5 year investment. For what, to break even while gold soars? XXXX Financial are scam artists. Run away. Fast.
The aforementioned company has over 70 filed and documented complaints over the last 3 years.
However, California's Business Consumer Alliance ( BCA ) gives this company a AAA Rating ( the highest most exemplary rating achievable ).
Hopefully now you understand why I stress checking a company's complaint volumes and substance over their ratings.
You can also use the following methodologies to perform additional due diligence on a potential dealer:
- Google Search the company's name or url with additional terms like "scam" or "rip off" to find potential postings of customer complaints.
- If a company doesn't publish their buy and sell prices live online be wary. If a dealer balks on giving you this information, you'll likely want to move on.
Exchange Traded Funds ( ETFs ) or Exchange Traded Products ( ETPs ), have recently emerged as one of Wall Street’s premier offerings, being heavily marketed as alternatives to tangible assets.
When you buy a gold or silver ETF or ETP, you do not become the sole owner of actual gold or silver.
These paper vehicles simply give investors price exposure, largely failing to provide insulation from broader economic risks such as defaults on exchanges, the bankruptcy of a trustee or broker, or an outright currency collapse.
For most gold and silver investors, the essence of keeping one's hard-earned wealth in precious metals is to own a physical asset that can weather any economic storm. When you put your wealth in ETFs, you simply become an unsecured creditor of a mega-bank that will happily gobble up your wealth if financial turmoil strikes.
Due to high annual ETF management fees, it is also often less expensive to store precious metals at home or in a private, segregated, fully insured gold and silver vault as opposed to having your silver ETF or gold ETF shares diluted from ETF management fees.
For an ETF to be backed by gold or silver, the fund managers will contract with a custodian to hold the gold or silver in a vault. The custodian is usually a large, international bank, serving as a custodian for numerous customers. Most of the time, because the custodian is a huge multi-national corporation with tens of thousands of accounts, when gold or silver is bought or sold, the metal never physically moves. Title to the bars of gold or silver is simply transferred from the seller to the buyer as a book entry in a massive computer network.
Within the last few years, precious metal ETFs like GLD and SLV, have amassed a market capitalization in the hundreds of billions of dollars, acquiring a disproportionate grasp over the trading of electronic gold and silver. These funds have diverted novice investor demand away from physical bullion and into fee-generating paper investment vehicles.
Despite their popularity and large trading volume, these fund’s prospectuses are filled with exhaustive and vague legal terminology. While these funds may provide significant trading liquidity, its physical gold and or silver holdings remain questionable and un-audited.
Liabilities within many ETF prospectuses are tossed around numerous Trustees, the custodians, and the sponsor. ETFs, such as GLD and SLV, exempt themselves from providing evidence of their holdings. They fend off audits through the use of multiple sub-custodians, and even allow Trustees to lease their holdings.
This is where additional problems arise: If the custodian is allowed to appoint sub-custodians, and the sub-custodians are allowed to appoint sub-sub-custodians and so on, now the gold or silver is spread out over various geographic locations. The only way to prove these sub-custodians hold enough gold or silver to fully back the account is for the ETF to require the custodian and all sub-custodians to be audited, during non-trading hours, all on the same day. If the gold ETF or silver ETF does not regularly require this type of audit of its custodian and sub-custodians, chances are high that the same physical gold may be purchased or owned by the same entity or individual at the same time.
A look into the GLD or SLV exposes a prospectus crawling with counter-party risk. Their prized liquidity is limited to market hours, a mere 6.5 trading hours, 5 days a week. ETF investors are further exposed to overnight risks, stock market closures, bank holidays, and financial market meltdowns that heavily cripple its liquidity claims.
Thus, the continuous 24/7 liquidity of tangible bullion crushes GLD, SLV, and other paper ETFs or electronically traded counterparts.
As is true of any electronic or paper form of wealth, the investor can be denied access to the value of his or her gold ETF or silver ETF shares due to Acts of God, war, force majeure, confiscation, computer glitches, fraud, insolvency, lawsuits, liens, garnishment, etc.
Given those caveats, coupled with the very real possibility that some silver and gold ETFs are not fully backed by physical gold or silver, investing in real, physical gold or silver will always be the safer bet.
To hear Mike Maloney discuss ETFs like GLD & SLV, click here.
When you buy into a silver or gold pool or certificate, you become a creditor of the bullion bank storing your precious metals. Just as when you deposit your currency at a bank, the bank doesn't keep your dollars separate from everyone else’s dollars; the bank simply tells you in your bank statements or online how much it owes you. In essence, your wealth is transmuted into digits on a computer.
Legally, however, when you buy into a gold pool or certificate program, the bank becomes the owner of your precious metals.
If the bullion bank gets into financial trouble, (gasp! Imagine that!) it can sell your gold to maintain its assets at a level where it won’t get shut down and where it will avoid a run on the bank.
In that instance, you won’t be paid back in gold, but rather in currency - less currency than the value of the gold the bank owed you - because logically a bank in trouble almost certainly would be forced to sell your assets at fire-sale prices.
If you live in a country with some kind of bank deposit protection (such as the Federal Deposit Insurance Corporation aka the F.D.I.C. in the United States or Financial Services Compensation Scheme in the U.K.), your gold will not be covered. That’s because deposit insurance only applies to currency - meaning that, in the likely event of a bank crash, currency deposits are safer than unallocated gold.
So why would anyone invest in one of these types of sketchy accounts?
Simple. It’s cheap and easy... and everyone loves cheap and easy, right!?
Purchasing gold or silver through pools or certificate programs is cheaper than purchasing a like amount of physical gold or silver bullion, primarily because most pools or certificates hold the metals in unallocated storage - which means your metals are commingled with everyone else’s metal. What’s yours is not yours, and in the event that your bullion bank goes under... it’s theirs.
If you are going to store precious metals, take a look at our bonded and insured silver and gold vaulting options in Salt Lake City, Singapore, Hong Kong, etc. These fully insured vault storage options are both segregated and allocated, which means that your metals are stored separately in your name and are owned by you alone.
In other words, if our company goes under, your metals stay in your name and ownership... guarded by trusted companies like Brink's who have been overseeing valuables for more than 150 years.
Futures and Options are contracts that can give precious metals investors leverage, which can magnify their gains, but also, magnify their losses.
Characterized as speculative investments, futures and options are traded on futures exchanges like the NYMEX & Globex. If there were to be a default on these commodities exchanges during the coming gold and silver rush, we believe the exchanges could change the rules to allow liquidation orders only.
In that case, investors holding futures contracts for gold or silver would be forced to accept payment in cash (currency) instead of redeeming their shares for physical silver or gold, as their contracts entitle them to do.
In an alternate scenario the exchanges might freeze prices on all open contracts, while prices on gold and silver for immediate delivery and off exchange silver (bullion in private hands or silver in private vaults outside of the commodities exchanges) continue to shoot for the moon.
For more on the risks of gold and silver futures and options, click here.
The debate over bullion versus mining stocks is an age-old one, and although both camps typically agree both silver and gold are great long-term investments, the argument on how to best invest is always a lively one.
Bullish arguments about gaining leverage to the appreciating prices of silver and gold make a great case as to why one might speculate and purchase mining company shares.
While we completely understand people’s interest in the mining sector there are some important distinctions investors should understand between owning physical bullion versus shares of companies that bring gold and silver to market from the ground up.
Let us make some distinctions between these two investment vehicles as well as explain some of the scams and cons to look our for within the mining investment sector.
The BGMI, or Barron’s Gold Mining Index, is one of the few indexes that tracks gold mining stocks going back seven decades.
Since the link between the U.S. dollar and gold was severed in 1971, physical gold has vastly outperformed gold miners, increasing over 35 times in price while the BGMI has gone up less than half of that.
At times mining stocks may go up in price faster and farther than physical gold, but they also tend to drop further and faster.
Over the long haul, we believe physical bullion to be a more reliable investment.
Should I seek a safe haven or should I leverage some speculative risk?
Unlike safe haven assets such as silver and gold bullion, mining shares introduce risk in the sense that they have, and many times do, go to zero.
Any stocks, especially mining stocks, are inherently risky.
A mine can have labor disputes, permitting and licensing problems; it can be shut down by environmental agencies (like the EPA). Mines can have structural failures from mine shaft collapses ( think Chile 2010 ) and or flooding. There is also the threat of mismanagement-theft-corruption ( see the Bre-X gold mine fraud ).
Many mines are located in countries that have histories of economic problems, military coups, and nationalization of their resource companies. Physical gold and silver, on the other hand, cannot go bankrupt.
Only a few of the largest and best-positioned miners have actually managed to be profitable in recent years; while many have folded due to increased production costs - largely caused by rising energy costs - and the fact that the low-hanging fruit of easily accessible deposits have been largely depleted. According to the United States Geological Survey, at current rates of production, the two metals the earth will run out of first are silver and gold. Gold reserves will be exhausted in 31 years, silver in only 26 years.
Another factor putting a damper on most mining stocks and on gold and silver supplies - is the long lead time typically required to get new mines up and running. Historically, it takes an average mine 5 to 7 years before a newly discovered lode is brought into production. In countries with stringent environmental regulations, such as the United States, it very difficult to develop new mines.
To hear Mike Maloney's thoughts on Gold & Silver Mining stocks, click here.
Yeah, but this is the great gold and silver bull market of the 21st Century! Shouldn't a rising silver and gold price make the profits of silver and gold mining companies rise as a result, consequently won't their share prices in turn do the same?
What about all those potential 10, 20, and even 100 price multiple junior mining share picks I keep reading about online?
The classical pump and dump scheme - whether it's oil-wells, diamonds, gold and or silver mines, the ability to manipulate an investor using their greed against them is a tried-and-true tactic which scam artists bank upon.
Pump and dump scams have been around as long as people have been digging holes in the ground. Here is how they typically work today:
This con usually starts with a thinly traded company which no one has heard of. The individuals looking to benefit from this ruse will acquire the company shares at a very cheap price, typically pennies a share.
They then market the stock as the next big thing, be it by old-school boiler room telephone operations, electronic press releases, internet videos, newsletters, emails, etc. You'll hear pitches like => "This silver discovery may be the highest grade exploration in... and you are going to want get in on the ground floor, the company's share price may more than triple shortly."
When new investors flood in, the unscrupulous promoters simply sell their cheaply purchased shares at there newly bloated prices leaving the new investors holding a bag of worthless stock shares.
The threat of a possible worldwide, round-robin currency devaluation is very real. It is not hard for us to imagine a time, not too far off in the future, where sovereign and institutional banking debts reach crisis crescendos, so much so that bank holidays may be declared globally.
Imagine a period of time when brokerage and banking accounts are frozen, ATM's are not functioning, communications may even be disrupted.
Something like a Brenton Woods-type II scenario could possibly result with central bankers from around the world gathering and agreeing upon on a round-robin of instant currency debasements based upon sovereign debt to GDP levels for example.
In such a scenario almost every fiat currency will lose against real monies like physical gold and silver bullion.
At the same time, equities, futures, options, ETFs, or stock shares will simply stand frozen in their brokerage accounts getting devalued in their respective currencies.
At GoldSilver.com, we want gold and silver investors to be educated, so that they can make the best decisions for themselves and their families.
We sell only the gold and silver products we invest in ourselves. We offer secure vault storage and home delivery because that is how we store our own precious metals... first in hand and then secondly in the hands of fully insured secure vault storage custodians we trust, outside of the banks and the failing financial system.
Even if you don’t purchase your precious metals from our company, we want you to be well informed so your don't make mistake with your hard earned savings. Hopefully you are now more aware of the various gold scams, silver frauds, and potential pitfalls when making your silver and gold investment decisions.
Now that you know what not to invest in, you may be wondering what silver and gold investment vehicles you should invest in. If you are having trouble picking out what product(s) to buy, click on this link.