Gold Coins or Gold Cons? Dangers Lurk for Precious Metal Investors

Signs that an already fragile U.S. economy may be headed for another slowdown rattled the stock market again last week. The public, meanwhile, is growing increasingly disenchanted with fumbling politicians unable to spur job growth.

With fear about the future on the rise along with mistrust of government, investors are sure to hear even more about the virtues of putting their savings in gold. But they should tread with caution.

Gold bugs pitch the precious metal as the only real currency and a safe hedge against any sort of economic trouble, be it inflation or deflation. In reality, though, the gold-selling industry is rife with the same kinds of shenanigans and conflicts of interest that are driving many to look beyond stocks to begin with, according to some recent news reports.

Aggressive salespeople often try to steer potential buyers into purchasing overpriced exotic, watered-down foreign gold coins rather than other, purer gold products, Mother Jones Magazine reported earlier this summer.

The Myth of Confiscation

Gold vendors and some high-profile gold-pushers in the media like to remind potential buyers that the U.S. government confiscated gold in the 1930s as the country faced the dire financial pressures of the Great Depression. At the time, though, investors were allowed to hold on to collector coins because of their status as antiques -- the implication being that by purchasing those overpriced gold coins, today's buyers may be able to take advantage of a similar loophole when the next crisis comes.

But those claims of confiscation are highly dubious. Gold ownership was made illegal during the depths of the Depression, but owners were and asked to sell it voluntarily, the Mother Jones article notes.

The benefits to gold vendors for pushing investors into exotic coins, though, are beyond doubt. The spreads and profit margins on such coins are north of 30%, far higher than the 5% that buttoned-down bullion tends to command.

Of course, whether gold really is such a safe haven for investors to begin with is doubtful. Prices of the precious metal tanked with stocks on Friday, for example, as they have before when panic spreads.

But despite the recent financial regulations passed with much fanfare by Congress, the majority of the public still seems to feel highly vulnerable. About 80% Americans said they believe the proposed reforms will fail to prevent a future financial crisis, and more than 75% said they don't have much or any confidence that they will make their savings and financial assets more secure, according to a widely-cited recent poll by Bloomberg.

Those investors desperate to get beyond dollar-denominated assets like U.S. stocks or government bonds may end up piling into gold. But they are likely to find the metals market just as hazardous to their wealth.