A Golden Opportunity for a Scam

Dear Rich Lifer,

If a rising tide floats all boats, what do rising gold prices get you?

Con artists…a lot of them!

With talk of a looming recession, the price of gold has risen to a level we haven’t seen in over five years.

And with climbing gold prices, we’re seeing more and more con artists crawl out of the woodwork.

A U.S. Senate Special Committee on Aging report found that over 10,000 Americans have been the victims of precious metal cons, with losses amounting to $300 million.

The stories are tragic, with some couples losing their entire life savings to the scams.

Con artists will do anything to get your money. From ads claiming gold prices below market value, to bait-and-switch tactics, and overcharging.

But have you ever wondered why gold attracts so many bad characters?

The Largest Gold “Scam” in History

Part of the reason could stem from the fact that gold as an investment was illegal for 42 years.

Executive Order 6102 — often considered the largest gold “scam” in history — was signed in 1933, by President Franklin Roosevelt, “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens.

This led to a massive seizure of gold from safety deposit boxes around the country.

Some U.S. citizens were lucky and able to transfer their gold to countries like Switzerland, but others had to take the $20.67 per ounce offered by the government in exchange for their gold.

The gold prohibition lasted until 1975. During this time the black market for precious metals grew rapidly and when Uncle Sam finally re-legalized gold, con artists took advantage.

The gold prohibition also led to a patchwork regulatory environment that lasted decades. The Securities and Exchange Commission said precious metals weren’t securities, and thus did not fall under its domain.

The Commodity and Futures Trading Commission had jurisdiction over some gold-selling arrangements, but not others.

Although the CFTC now has clear jurisdiction, there are still several exemptions that make enforcement tricky. That’s why today you see a lot of gold fraud scams being exposed through a state attorney general or financial regulator rather than a federal agency.

Why Is Gold So Attractive to Scammers?

There’s something about the yellow metal that makes it easy to pull the wool over the eyes of even relatively sophisticated investors. Probably due to the fact there are so many ways you can pitch it.

If you don’t want to buy gold bullion, you can buy gold “collector” coins. If you don’t like gold coins, you can invest in a gold mine. Scam artists can spin it any which way they want to suit their motives.

Now I’m not saying you shouldn’t invest in gold or that the aforementioned are illegitimate in any way. I’m just warning you that given the current climate, you need to be extra cautious.

So here are my five gold scams to watch out for:

Scam 1: The Bait-and-Switch

A common ploy is for fraudsters to lie about the condition of a gold coin. MS-70 is a “mint state” coin that has never been handled.

Con artists will try to sell you a mint condition coin and then swap it for a lesser grade coin hoping you won’t notice. For instance, a 2002-P $25 half oz. Gold Eagle is worth $857 at a grade of MS-65 — really good condition, but not perfect.

MS-70 for the same coin is worth $1,650. Inexperienced coin buyers might not be able to tell the difference, so they end up overpaying hundreds of dollars.

If you’re buying gold coins always check the grade of coins with a third party before buying. Reputable dealers will have no issue with third-party appraisal. And if they do, that’s a sign you should shop elsewhere.

Scam 2: Lipstick on a Pig

Another scam you’ll run into with gold coins is grading certificates and fancy plastic casings. Fraudsters will try to trick you with inferior grade coins by hiding them behind layers of plastic or sticking them to some kind of ornamental holder.

They might even go as far as selling you gold-copper alloy if they think they can get away with it. The fix here is to steer clear of collectors’ items and gold coins in fancy packages. Serious collectors and investors generally don’t care whether their gold coins are displayed in nice cases or not.

Scam 3: The Salomon Brothers Index

If the reason you’re buying gold is to make a decent return or hedge against inflation, beware of this next scam. Unscrupulous dealers like to reference the Salomon Brothers Index to make it seem like you’ll get rich quick if you buy now.

The annual index, was compiled by the New York investment bank Salomon Brothers, and often showed appreciation of 12% to 25% a year. The truth is the Salomon Brothers index was based on a list of 20 very rare coins.

The Gold Eagles you find at your local coin shop are more common than you know and don’t appreciate at nearly the same rate. So be realistic in your expectations for returns. Don’t let scammers pressure you into buying under the guise that what you’re buying is going to be worth a lot more in the future.

Scam 4: The Empty Safe

While it might seem inconvenient to store your own gold, or downright foolish if there’s a chance someone robs you, the alternative is you place your gold in the trust of someone else.

Shady dealers will prey off this fear by offering to store your gold in escrow for a small fee. The problem is these dealers don’t actually have any gold to sell you. They’re essentially charging you a storage fee for an empty safe.

Unless you find a dealer that can store your gold whom you absolutely trust, you’ll have to take the necessary steps to be able to store your own gold. Like any investment, gold carries its share of risk. Storage and theft is part of that risk you need to be willing to take on.

Scam 5: Swiss Procedure

Have you ever received an email, out of the blue, asking for your help to arrange a huge gold deal?

It’s surprising this works but it must, because this type of scam is still prevalent today.

The first question you need to ask is why would anyone need my help? If someone is mining gold in Afrifa or south-east Asia, why would they be contacting you.

Ignore any email that talks about “Swiss procedure,” or “release payments,” or “5,000 metric tonnes.” It’s all fake news.

Done right, investing in gold can be safe, lucrative, and fun. Just be overly cautious if someone is trying to sell you something that seems too good to be true.

To a richer life,

Nilus Mattive

Nilus Mattive

The Daily Reckoning