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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, Collector, &
Semi-Numismatic Coins
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.
Spokesman, Radio, &
Television Advertisements
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.
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.
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.
Gold Exchange Traded Funds, Gold ETFs + Silver Exchange
Traded Funds, Silver ETFs
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.
Silver & Gold Pools /
Certificates
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.
For more on the risks of gold and silver
futures and options, click
here.
Gold & Silver Mining Stocks
or Bullion?
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.
Longterm Performance Figures
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
).
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