Don't Fall for Gold Scams|
April 23, 2013
With the sharp sudden drop in the commodity market price of gold and silver, extreme physical supply shortages and much higher premiums have developed.
Along with dealers across the country, my firm is being swamped with callers and visitors looking to acquire physical gold, but expecting fast delivery and to pay the low premiums at which products could be purchased when spot prices were 20 percent higher. Some customers, while not happy with the circumstances, understand the dynamic change in the physical markets.
But – there are also plenty of customers who refuse to accept reality and in some instances accuse the dealer of trying to rip them off (though we have had several people who, after initially reacting like that on the first contact, come back shortly thereafter when they find out that our pricing and delivery quandary is the same across the country).
Unfortunately, customers who do not understand the incredible surge in demand for physical gold and silver and want instant gratification and lower premium levels become easier victims for various scams. In such hectic markets, expect some of these frauds to become more prevalent. Don’t fall for them. Here are some of the more common scams and how to avoid them.
1. Free storage offered by the selling dealer. Watch out for dealers offering customers what appears to be a bargain price for physical gold and silver coins and ingots with the additional enticement of offering free storage if the customer leaves the purchase in the custody of the selling dealer. There have been too many instances over the years of companies taking customer money and not purchasing any or all of the product. The customers invariably find this out when the company fails and does not have sufficient inventory to meet obligations.
Some of these companies operate fraudulently right from the start. The sad news is that we have seen too many established and trusted dealers who have changed to this operating style when they were struggling financially. For your own protection, avoid any dealer that suggests you leave your purchases in their possession. Your best protection is to take direct custody of your purchase or for you to arrange storage through a company not affiliated with the seller, where the account is in your name and not that of the selling dealer.
2. Dealing with a new company. This is not technically a scam, but rather a condition that offers higher risk to the buyer than working with well-established dealers, especially those with whom you have an existing relationship. The failure rate for new businesses is high, even for coin dealers. There are instances where a new company may be opened by someone who has lengthy experience in the industry. But, there are far more cases where someone thinks that being a coin dealer is the road to riches even though they lack either the numismatic competence, business acumen, industry contacts, or sufficient capital to sustain the new business.
New businesses often offer what seem to be extra special pricing or customer service in order to establish themselves. However, in stressful and volatile markets such as we have today, wholesalers will frequently decline to accept new accounts or impose tougher credit restrictions on them such as requiring the receipt of bank wires in advance of confirming transactions.
As a result, the most reliable dealers during hectic markets are likely to be those who have a long history in business, continue to operate in mostly the same fashion as they have in the past, and are more likely to be a company that you have contacted or conducted transactions in the past. In the current market, for instance, my company is declining most large orders from new customers unless they are in a position to send and immediate bank wire. We are focusing on taking care of our established customers first, a pattern pretty consistent with dealers across the nation.
3. Products that appear to be solid or pure gold or silver, but are not. When someone wanting to purchase silver American Eagles is told that the end of the waiting line is for delivery in June at the earliest, as it is right now, they may fall prey to buying alternative products that appear on the surface to be close to silver Eagles, but may only be plated or non-silver products. The risk of this problem is much larger when dealing with new “coin dealers” or those who only market to the general public rather than to experienced collectors and precious metals investors.
If you are looking at possibly acquiring an unusual form of precious metals, scrutinize all the fine print and understand exactly what is being offered. For example, an “eight ounce silver Eagle layered in 100 mills .999 fine pure silver” is simply a silver-plated product with almost no intrinsic value. If you see such products offered by one dealer, it might make sense to check with another dealer to see if they can tell you exactly what the product is or, if legitimate, if it can be provided at a better price.
4. Cold calls. Like the rest of these consumer protection tips, this applies all the time. However, it is likely to be a more common problem in the current volatile market than in normal markets. My general experience is that companies making cold calls are, at best, overpricing their merchandise. At worst, they could be fraudulent scams. If you did not initiate contact with that company, it is probably best to hang up on them.
5. Leveraged purchases. As I explained in my Feb. 19 Numismaster column, companies pushing their customers into leveraging their purchases are doing so to maximize the profits of the dealer. Borrowing funds to make a larger purchase substantially increases the risk of loss to the buyer and has other costs.
Some companies advocating leveraged purchases gloss over the potential risks and problems for buyers. As a result, many who have made leveraged purchases in the past and who then suffered large losses have complained that they didn’t know what they were getting into and were misled by the sellers. Using leverage in investments is suitable only for those who understand the nature of this strategy and have the financial strength to handle large losses that may result. If a dealer is making a strong push for their customers to make leveraged purchases, your best protection is to never do business with that company.
This is just a bare-bones list of the various kinds of scams that may be foisted on the public in the current gold and silver frenzied markets. In general, if an offer sounds too good to be true, check the fine print and maybe even call another dealer or two to comparison shop. While other dealers would have the incentive to bad mouth the competition and try to steer business in their direction, pay attention to any negatives they have to say about the offer you are considering.
At the Fall 2012 Michigan State Numismatic Society show, I gave a presentation titled “Pitfalls To Avoid When Buying Physical Precious Metals.” It contains many more consumer protection tips than I have space to include in this article. To request a copy of the Power Point file of this presentation, please send me an email at firstname.lastname@example.org. In the meantime, keep an eye on your wallet and be on the alert for those who may seek to take advantage of your interest in acquiring physical gold and silver.
Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Other commentaries are available at Coin Week (www.coinweek.com and www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at www.1320wils.com).
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