Commodities Watchdog Warns of Precious Metals Scam

Low deposit gold-buying scheme could be a precious metals scam: Internet Scambusters #428

On the pretext of offering a big profit for a small outlay, unscrupulous firms are targeting investors with a “buy now — pay later” precious metals scam.

Other schemers operate currency scams, suggesting you can make a quick killing using complex foreign exchange trading techniques.

Now the government body responsible for overseeing commodities and currency trading has issued a warning to steer investors clear of these tricksters. We have the details in this week’s issue.

Commodities Watchdog Warns of Precious Metals Scam

The government organization responsible for overseeing trading in commodities has issued a warning about a precious metals scam that’s hooking scores of gullible investors.

Recent surges in the price of gold have attracted inexperienced speculators into the metals and currency markets, in their quest for high returns and quick profits.

Most sane investors know that the promise of fast, juicy profits is either laden with high risks or, even worse, a scam.

In an earlier issue of Scambusters, Heavy Metal — How to Avoid Rare Coin Scams, we exposed precious metal scam tricks relating to rare coins. The risks we outlined then are still relevant today, and some apply to the whole field of metals trading, not just coins.

But the particular precious metals scam that has the Commodity Futures Trading Commission (CFTC) worried right now is a “buy now — pay later” scheme that seems particularly attractive because of the low initial outlay.

The Commission explains: “Certain companies advertise on radio, television or Internet websites, or make telephone ‘cold calls,’ to promote the purchase of precious metals such as gold, silver and platinum.

“In the CFTC’s experience, the advertisements, infomercials and telephone solicitations often promise quick riches — such as the ability to double or triple the customer’s initial investment in just two or three months — all with low risk.”

These firms often tell customers they need pay only a fraction of the total purchase price.

Hidden Loan Agreement

So where does the rest of the money come from? Well, when you sign up for the “investment” you’re also signing a loan agreement for the remainder.

This may or may not be made clear at the outset. If it is, the firms imply you’ll make so much profit, you’ll be able to pay off the loan and pocket the difference.

The math in this precious metals scam is deceptively tempting. Say you put down $10,000 to buy $50,000 worth of gold, with the remaining $40,000 being financed. Then you sell that gold for $60,000 and repay the $40,000, leaving you with $20,000 — in effect you doubled your money.

Hang on, though. Setting aside the high risk of gold prices not moving in your favor at all, there’s also the question of interest charges, loan arrangement fees and commission charges for the gold purchases, things these companies never tell you about, or that they conceal in the fine print.

But there’s more. In fact, if it’s a precious metals scam, the company, who claims to be storing your gold for you, probably never bought the gold. So they never borrowed the money either. They just keep sending you a bill for those payments, plus “shipping and storage charges.”

And, if the price of gold actually falls or you’ve accrued interest payments, they tell you the bank (or whoever supposedly loaned the money), wants you to cover the difference between the growing size of the loan and the value of your gold.

Want your money back or to cash-in on your assumed profits? Forget it. Although the company said it would be easy to sell your precious metal, buried away in the fine print you’ll also find a clause that says you can’t sell for a couple of years. By then, this precious metals scam artist will have disappeared.

This type of con, based on a supposed loan to lever your buying power, is known in the commodities business as a “leveraged precious metal scam.”

The Federal Trade Commission (FTC) has recently issued its own warning about this and other precious metal scams, including fraudulent or questionable tactics employed by some companies offering to buy your used jewelry and gold. Be sure to read the warning: FTC Testifies about Consumer Protection Issues Arising from Coins and Precious Metal Investments.

Meanwhile, the CFTC (sorry about all these abbreviations — don’t confuse them with the FTC) offers the following guidance, which we’ve summarized, if you’re thinking about buying precious metals:

  • Be skeptical about unsolicited phone calls and anyone offering high return/low risk investments. They don’t exist.
  • Be wary of any company asking for immediate payment, especially wired cash. (We’d go stronger than this and say don’t deal with such companies.)
  • Check out the company’s credentials with the CFTC, your state Securities Commissioner, the Attorney General’s Consumer Protection Bureau and the National Futures Association.
  • Also check out the company online and with your financial adviser.
  • Ensure you know about all the fees they charge.
  • Be cautious about dealing with overseas companies — they’re not subject to the same controls as US firms.
  • If in doubt, don’t buy.

Currency Scams Warning

Alongside its warning, the CFTC has also issued an alert about currency scams.

Trading in foreign exchange (forex) contracts is a highly specialized form of investment, best left to the experts.

But, once again, dubious companies have lured inexperienced investors into this market.

“The CFTC has witnessed the increasing numbers and growing complexity of financial investment opportunities in recent years, including a sharp rise in foreign currency trading scams,” the Commission warns.

“While much foreign currency trading is legitimate, various forms of foreign currency trading have been touted in recent years to defraud members of the public.”

Again, these firms use advertising and cold calling, promising low risk high returns via complex futures and options contracts. (If you want to know more about these financial terms, see the entry in the online Wikipedia reference.

Sometimes, they even offer to set up their victims as currency traders (but you have to use your own money and trade directly with them).

The CFTC cites the following typical statements that likely are fraudulent:

(Begin CFTC list)

  • Whether the market moves up or down, in the currency market you will make a profit.
  • Make $1,000 per week, every week.
  • We are out-performing 90% of domestic investments.
  • The main advantage of the forex markets is that there is no bear market.
  • We guarantee you will make at least a 30-40% rate of return within two months.

(End CFTC list)

Once more, these companies offer a form of leverage known as “margin trading.” So, here’s a basic rule: If you don’t know what that means, don’t do it!

Also, watch out for firms claiming to trade on “the interbank market,” which is usually reserved for deals between banks and big financial institutions.

To learn more about this rather technical subject, read the CFTC advisory.

Of course, you should always discuss any investment plans with your financial adviser.

This becomes even more important when you’re thinking of entering the rarefied atmosphere of commodities and currency trading.

Otherwise, currency scams or a precious metal scam will very quickly take away your hard-earned savings.

That’s it for today — we hope you enjoy your week!