Five Gold and Silver Precious Metals Scams to Avoid
Commodities / Gold and Silver 2011 Jul 20, 2011 - 06:46 AM GMTBy: GoldSilver
So perhaps you’ve decided to invest in gold and/or silver; but wait! There are a few things you need to know before you begin your journey with precious metals.
At GoldSilver.com, we have spent years educating our customers on the virtues of investing in gold and silver, and we believe those who have made the choice to invest in precious metals, specifically silver and gold, are going to be on the winning side of a massive impending wealth transfer. But that doesn’t mean all precious metals investments are the same.
We personally invest in gold bullion and silver bullion right alongside our customers, so we have a vested interest in not only figuring out the optimal timing in the marketplace, but also figuring out the best vehicles in which to make an investment in precious metals.
Over the years, a vast number of precious metals-type investments have proliferated in the marketplace, but are they the real deal or are they dangerous to your long-term financial health? Many precious metals-type investments offer some benefits, but can also multiply your risk.
Rest assured, we at GoldSilver.com have done the research, we can help streamline your learning process and hopefully, help you to make the right investment choices the first time you commit to buy.
Before people invest in precious metals, they must understand their reasons for doing so. For most of us, the goals are wealth preservation and the chance for spectacular gains. There are easy, safe, and low-cost ways to accomplish those goals.
Shortly, we will tell you the best way to invest in precious metals, but first, it’s important you learn the worst possible silver and gold scams. By knowing about potentially dangerous precious metals investments you will better understand the stakes and more easily make the right investment decisions for yourself and your family.
1. Numismatics
A numismatic coin is a collector coin that has value in excess of its metal content because it is historical 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 are taking a major risk because you are already deep in the 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 20 and 50% of your purchase price right off the bat.
Consider this: when you buy a numismatic coin you pay three 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 bucks.
That means before you are “in the money,” 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 build 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 they are good for the seller.
The biggest myth about numismatic coins is that the government can never confiscate them. The second 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 a hefty numismatic premium and hefty price tag.
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—if you didn’t exchange your gold for Federal Reserve notes, you could be sentenced for up to 10 years in prison.
The only exception under Roosevelt’s order was collectible gold coins (rare or unusual, having “a recognized special value” to the owner). That exception to the law 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 customers are spooked by those prospects and are persuaded to purchase heavy premium pre-1933 collectible coins—usually earning the dealer a nice, hefty profit.
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, please click here.
2. Pools & Certificates
When you buy into a bullion 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—essentially, your wealth is transmuted into digits in 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 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, primarily because most pools or certificates hold the metals in unallocated storage—which means your metals are comingled 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, Miami, Hong Kong, etc. These 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. If we go under, your metals stay in your name, and you will never be beholden to a bank.
For more on Pools & Certificates and other gold and silver scams, click here.
3. Leverage Accounts
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.
Margin investment is borrowing money from your broker to buy a stock and using your investment as collateral. Margin generally enables the investor to own more stock without paying full price for it. The downside to margin is, if your investment loses money, your losses are exponentially greater. In the case of margin, you are going up against a mathematical formula and compounding fees that are engineered to work against the novice.
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.
For more on the risks of Leverage Accounts, click here
4. Futures & Options
Futures and Options are contracts that can give precious metals investors leverage, which can magnify their gains, but also, magnify their losses.
If there were to be a default on the 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 (silver in private hands or silver in private vaults outside of the commodities exchanges) continue to shoot for the moon. It has happened before, and it will likely happen again.
For more on the risks of gold and silver futures and options, click here.
5. Gold ETFs / Silver ETFs
When you invest in a gold or silver exchange-traded fund, you do not become the sole owner of actual gold or silver. For an ETF represented 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 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.
This is where problems can 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 at any given point in time 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.
Many metals experts believe that silver ETFs and gold ETFs may hold less than the amount of precious metals they supposedly own or none at all.
For most of us precious metals investors, the essence of keeping your 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.
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 silver and gold ETFs are not backed by physical gold or silver, investing in real, physical gold or silver will always be the safer bet. The higher premiums investors pay for physical gold and silver stored either their home or in a segregated fully insured vault account seems a small price to pay in exchange for a safe and secure investment.
One final note on silver and gold ETFs, due to high annual ETF management fees, more often than not, it is much less expensive to store precious metals in a private, segregated, fully insured gold and silver vault as opposed to having your silver ETF or gold ETF shares diluted from exchange trade fund or ETF management fees.
For more on why physical bullion stored in a private segregated vault is a much wiser choice over gold ETFs and or silver ETFs, click here.
In Closing…
At GoldSilver.com, we want our investors to be educated, so that they can make the best decisions for themselves and their families. We don’t sell or offer many types of products simply because we don’t believe in them—and we won’t invest in them ourselves. We offer secure vault storage and home delivery because that is how we store our own precious metals—in hand or 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 to better deal with the gold and silver investment world out there—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 to buy, check out Mike Maloney’s video here:
Mike Maloney is the owner and founder of GoldSilver.com, an online precious metals dealership that specializes in delivery of gold and silver to a customer's doorstep, arranges for special secured storage, or for placement in one's IRA account. Additionally, GoldSilver.com provides invaluable research and commentary for its clients, assisting them in their wealth building endeavors.
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