Gold Investment Scams: How to Avoid Them

With gold prices getting higher, more gold investment scams are on the rise. Many are looking to gold for safety and protection and can become vulnerable because their other investments are not working out for them. This article provides ways on how to avoid these scams.

By CNBC
August 29, 2012
Yahoo! Finance

Gold is good. Or is it just pitched to you as a way to make easy profits by television ads and telemarketers?

With the price of gold rising steadily, as recently as this week, the popular mindset of its safety and value has been around since before the Gold Standard backed the U.S. dollar . But before you get in on the gold rush, the Federal Trade Commission (FTC) wants you to beware of fraudsters looking to make a quick buck.

According to the FTC, complaints in the area of investment frauds, including precious metals, have increased sharply over the past three years. In 2011, the FTC fielded 7,657 complaints related to investment fraud, compared to 6,490 complaints in 2009.

"Consumers are vulnerable, because other investments are not panning out for them. They're looking for something different and precious metals are presented to them as a winning situation," FTC attorney Dama Brown said.

After the financial crisis in 2008, as gold prices continued to rise, con artists began capitalizing on the economic climate and taking advantage of people's fears, Brown said.

Fraudulent telemarketers sold precious metals as safe investments, but brokers have testified that they were in fact very high-risk transactions.

"Unfortunately, consumers are losing money. At a minimum it's several thousand dollars. And often we see that it's consumers entire retirement," Brown said. "Some are even encouraged to cash out their IRAs, and they end up losing it within months."

The Pitch: As Safe as Keeping Metal in Your Mattress?

As part of a Federal Security Investment Task Force, Brown has been involved in many precious metal scam investigations. She has uncovered deceptive sales scripts that bill precious metals as a safe-haven investment, even calling it "as safe as keeping metal in your mattress."

"They cold call consumers and give very strong sales pitches, saying precious metals will rise significantly, doubling or tripling in as little as 30 days, and that consumers must send in money immediately so they don't lose out on the opportunity," Brown said.

Studies have shown the number of companies offering consumers the chance to buy or invest in precious metals has increased, according to a fraud alert released by the U.S. Commodity Futures Trading Commission earlier this year.

"However, many of these companies do not actually purchase or store any metal for their customers," the report said.

How Precious Metal Scams Operate

One such fraudulent company was run by fugitive Luis Ferreira. A two-time telemarketing fraudster, Ferreira was fresh out of federal prison and barred from fundraising for three years. In 2008, he used his mother's name to incorporate Spyker Consulting, a precious metals telemarketing firm based in south Florida.

Without direct access to the precious metals market, Spyker supposedly contracted a London-based "clearing firm" to buy, sell, and store the precious metals.

But the company was a sham - the London-based clearing firm did not exist. The mail and phone calls that supposedly went to that office were simply redirected back to the Spyker's Florida office, according to the Federal Bureau of Investigation.

Rather than investing his clients' money, Ferreira pocketed it, up to $27,000 a month by 2010, according to the FBI. When the feds confronted him, Ferreira confessed. He pled guilty to conspiracy and received a three-year prison sentence. Rather than serve his time, however, Ferreira disappeared.

Falling Prey to a Career Conman

The news devastated investor Steve Starr, who lost $25,000 in Ferreira's scam. Starr owned a Tampa Bay, Fla.-based RV dealership that in 2008 was seeing an all-time low in sales when a Spyker telemarketer called him. The sales pitch convinced him to invest $5,000 in silver. Over a few months, Starr received statements that showed his money growing.

"I thought it was the best thing I ever did 'cause I watched the silver go up and up and up. And I said, 'Wow, these guys were right. It was worth 15 percent commission,' " Starr told CNBC's "American Greed: The Fugitives."

Then another Spyker telemarketer called. Starr recalled, "[He] told me palladium is getting ready to take off and I should invest in some palladium. He says you need to get every dime you can scrape up and he says you're gonna make a ton of money."

So Starr doubled down and invested $20,000 more. But by late 2009, he sensed trouble. His statements stopped coming and when he tried to liquidate his account, he was told he had to wait.

Needing to pay property taxes, Starr took out a home equity loan on his previously paid for house. The next time he called Spyker, the phone was disconnected. Starr lost his entire investment and was now saddled with debt.

"I sleep very little. I'm lucky if I sleep two or three hours at night. I mean my health has gone downhill. It's been, it's been devastating," he said.

Not All Brokers Are Equal

Unfortunately, Starr's story was like many others Brown had heard before. Potential investors should know that people who sell "physical" precious metals, like gold or silver bullion, are not required to obtain licensing or training from the National Futures Association (NFA). Yet, some companies advertised their brokers as being licensed, Brown said.

"They are referring to a telemarketing license. If they were licensed in commodities, we'd call them brokers. But instead we consider them telemarketers," Brown said.

The FTC has found that many fraudulent companies were operated by brokers who had lost their license to sell stocks or futures because of deceptive sales practices.

The best advice Brown said she could give was to search the NFA database to check the regulatory history of your broker. It tells you if the person is licensed, sanctioned, or banned from the NFA. If you don't find your broker's name listed, you should think hard about to whom you're giving your money, Brown said.

"Why would you want to deal with someone if they're not licensed and they're in this unregulated trade, especially when there are precious metal companies that use licensed brokers? I would suggest finding someone who carries a license," Brown said.

More Tips to Avoid Precious Metal Scams

Brown also suggests the following tips before investing in precious metals:

  • Do a general Internet search of the company, making sure to check the Better Business Bureau.
  • Register for the federal "Do Not Call List." Legitimate telemarketing companies won't call you if you're number is on this list because it's against the law.
  • Be cautious of opportunities to finance. Go beyond what the telemarketer tells you and read the fine print, including excessive service and storage fees, and high interest rates.
  • Find the physical address of the company's location and drive by it.
  • If you buy physical metals, such as gold or silver bullion, consider taking delivery of your purchase and storing it yourself, rather than entrusting a company to do so.
  • Watch out for overzealous sales pitches! If a telemarketer says an investment is risk-free, or guarantees high profits with very low risk, think twice - especially you're pressured to act quickly.

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