America has a serious case of gold fever. Because of the shaky economy and the soaring price of gold, people are eager to buy gold coins and invest in gold stocks. This gold rush mentality presents a golden opportunity for hucksters to pitch their bogus get-rich-quick schemes.
Federal and state authorities are going after the scammers. But these guys can steal millions of dollars from thousands of unsuspecting victims before they are shut down.
For example, a few weeks ago the owner of a Florida company, The Global Bullion Exchange, pled guilty to running an illegal investment scheme that prosecutors say defrauded more than 1,400 out of more than $25 million. (U.S. Attorney’s news release)
The company told customers they could purchase gold bullion for a small down payment using the company’s “leverage” program. In fact, investigators say the company never bought any gold.
The Financial Industry Regulatory Authority just issued an investor alert to warn people about gold stock scams. Gerri Walsh, FINRA’s vice president for investor education, tells me they’ve seen “a proliferation of misleading investment opportunities” related to gold. Walsh says con artists are making claims about return-on-investment that are “based on thin air.”
I spoke to her at length about this growing problem.
Q: What sort of things are you seeing in the way of questionable investments?
A: Some are in gold mining companies. Others are in gold directly — or at least that’s what they claim.
Q: What is your major concern?
A: Our concern is that investors are being swept away by the feeding frenzy that’s being created by blogs and tweets and other promotions that are touting gold. And what we want investors to do is to step back and think about whether these are really good investments.
Having some mutual funds that invest in gold in your portfolio can be a sound diversification strategy. But the reality is that exposure or over-exposure to gold as a commodity can be a risky thing.
Q: I understand telemarketers are pitching all sorts of ways to invest in gold. What do you think about responding to a cold call like this?
A: FINRA recommends that you never invest based on a cold call.
Q: Gold investments are also being sold via free lunch seminars. They’re supposed to be educational, but we all know the goal is to sell something. How do you feel about them?
A: Free lunch seminars are often used to push sales, absolutely. Many people go to them because they are interested in education. But they find out that when the sales seminar is over that’s when the hard pitch really begins.
By virtue of signing up for the seminar you usually give them information about yourself, such as your investment objectives and your contact information. So people who contact you after the sales seminar are likely to start getting to know you, developing some trust between you and them. That’s when they’ll go in for the kill and make a pitch that you feel obligated to respond to.
Q: What’s FINRA’s advice to people who are interested in having some of their portfolio in gold?
A: Our advice is to slow down and think about whether that investment is right for you. If you’re considering investing in gold bullion, you need to be very, very careful to make sure that the gold actually exists.
If you’re thinking about a fund, such as an Exchange-Traded Fund that invests in gold, you want to find out exactly how the fund invests in gold. In other words, does it hold the physical gold, because some funds do, or does it invest in gold futures contracts or somehow track some other gold-related index?
We encourage investors to check out both the investment and the person selling the investment before they do anything. You can do that on the FINRA web site. You can see if the person you are dealing with is licensed to sell securities.
Q: While gold is the hot investment right now, a smart investor should have a diversified portfolio, right?
A: Legitimate gold and ETF investments might be a good or sound diversification strategy for some investors. But you need to be aware that those investments can be very, very volatile. And a heavy concentration of gold investments could leave you overly exposed to that single commodity and at risk of losing a substantial amount of money.
We caution investors not to put all their eggs in one basket. And the feeding frenzy that’s going on with gold right now might lead people to liquidate their assets and put all of their money into gold which they might perceive as safe. But that’s an incredibly dangerous strategy because being exposed to a single commodity, to a single investment, is never a good idea.
Watch out for fool’s gold
The FINRA warns investors to be on the lookout for any pitch for a gold investment that:
- Claims to tie stock performance to the general rise in gold prices — a rise in gold prices does not guarantee a rise in the price of a gold company's stock.
- Uses scare tactics such as the threat of inflation or an economic meltdown.
- Makes speculative claims based on a new gold reserve's proximity to an existing reserve or centers on a company that has changed its name or trading symbol to align it more closely with gold. For example, FINRA says one company that currently purports to engage in gold mining was originally incorporated to provide golfing opportunities on private courses to nonmembers.
FINRA: “Gold” Stocks — Some Investments Mine Your Pocketbook
Federal Trade Commission Consumer Alert: Investing in Bullion and Bullion Coins
Federal Trade Commission Consumer Alert: Investing in Gold? What’s the Rush?