“Good as Gold” Not Always True for Investments

~ By Gerald Rome, Colorado Securities Commissioner ~

Precious metals are a long-standing investment option that are often appealing to consumers, and that can cause headaches for regulators. An investment in gold is not fool-proof. It takes a lot of time, research, and knowledge to make the most of these types of deals, and unfortunately that fact coupled with the lure of easy money, often termed “phantom riches,” makes precious metals perfect fodder for scam artists.

Historically, gold investments fluctuate more than the stock market, and often move in reverse of what stocks and bonds are doing. Before you decide to invest, think about the following “red flags” of a potential scam, and then learn what you can do to help ensure that you get the most out of a precious metals investment.

Gerald Rome, Colorado Securities Commissioner

Gerald Rome, Securities Commissioner

Conmen often state that precious metals are not regulated as investments and will try to dissuade purchasers from inquiring into proper licensure. Sales agreements may lack specificity on which bank or financial institutions will loan you money as part of a “financing agreement” to make the investment. Cons often offer to store the precious metals in a company facility or “bank.” Often conmen trying to sell gold will guarantee that you can make a ton of money with minimal risk, and will claim to have discovered a highly complex purchasing technique that brings unusual success. If you hear any of these warning signs, or simply have a gut feeling that something isn’t right, call a regulator!

If you do decide that gold investments sound like something you’d like to pursue, here are some ways to stay safe depending on which investment method you choose.

Mutual funds: Although many are advertised as “Gold funds,” mutual funds by law must earn 90 percent of their income from securities. Therefore, be aware that with these funds only 10 percent maximum assets are actually invested in the metal itself.

Exchange-traded products: Watch for hidden costs that dilute the holder’s interest in gold. Also be aware that those with investments in gold ETFs may be subject to higher rates of taxation, so be sure to thoroughly read the prospectus and consult with a tax attorney first.

Stock in mining companies: Profits in these investments are most closely tied to the price of gold, since the success of the companies rises and falls on the profitability of their product. Make sure these investments are properly registered and the salesmen properly licensed, or consult with a financial adviser, before investing. Therefore, be aware that these investments are the most volatile. Additionally, watch out for “dirt pile” scams where shell companies will pretend to have struck gold in a place where there is actually nothing.

Buying physical gold: An investment that is thought of as the “safest” bet, the physical ownership of a precious metal can be simpler and less risky. However, be sure that the dealer you go through is reputable, and do your own due diligence first to ensure that you don’t get ripped off.

Gold coins: The value of gold coins can fluctuate based upon the perceived scarcity of the coin, its quality, current demand, market sentiment, and other economic factors.

As always, if you have questions about an investment, feel free to give us a call at (303) 894-2320.