Beware of Scammers Peddling Gold

Gold investment scams
Gold investment scams

The financial world has long been full of various scams, but our current economic environment is especially susceptible to them. With the stock market stuttering and stumbling in recent years, scam artists have glommed on to the one asset that has outshined nearly every investment: gold.

Gold has been on a tear, rising from about $600 per ounce in 2006 to above $1,800 recently, and no one is more aware of our sudden interest in the shiny metal than scam artists.

They post online, write blogs, produce videos, tweet for attention, call your home, and offer "seminars" that feature free lunches. Some of those free-lunch seminars have turned out to involve Madoff-like Ponzi schemes, with one relieving 3,000 people of $300 million. (That's $100,000 apiece for some potato chips, a stale sandwich, and a phony gold investment.)

Set Your Scam Detectors to High Alert

The Financial Industry Regulatory Authority (FINRA) recently sounded alarms about gold scams that can look surprisingly legit to the untrained eye. After all, investing in gold securities is a completely above-board way to add some exposure to precious metals in your portfolio. You can buy shares of companies that represent ownership in actual chunks of actual gold, that mine for it, or that produce it from the mines.

However, be wary of anyone promising or even hinting at astronomical returns. And don't fall for rumors. Sure, a company might get bought out by another for a premium price. But it also might not. And if it's really likely to get bought out, other investors will probably have bid its price up somewhat, in anticipation.

Many scams simply involve outright lies. According to FINRA, the Securities and Exchange Commission is going after a Florida-based mining company that claimed to have a project in Ecuador with more than $1 billion in gold reserves.

Other red flags include appeals to your emotions, such as fear or greed. Scammers might try to freak you out about possible high inflation or a huge upcoming economic crisis.

Be skeptical of any investment that links the performance of a stock to the price of gold. They don't necessarily move together. Barrick Gold (ABX) and Yamana Gold (AUY), for example, two large gold companies, have each averaged about 10% annual growth over the past five years, while the price of gold tripled. The Market Vectors Gold Miners ETF (GDX), which owns shares of a variety of gold miners, has also averaged about 10% over the same period. Another gold giant, Goldcorp (GG), averaged 15%.

The Dangers of Legitimate Gold Investments

Of course, plenty of gold investments are not scams at all. They're legitimate businesses. But that doesn't mean they're without risks of their own.

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During the short term, you need a strong stomach to weather the ups and downs. For example, between 1979 and 1980, gold more than doubled, from about $300 to $600. But by 1981, it had fallen to $480, and by 1985 it was close to $300 again. Gold can be very volatile. We've seen the upside of its volatility lately, but don't assume that it can't fall sharply.

Even if you're strong enough to buy and hold on tight for the long haul, the payoff isn't exactly a slam-dunk. According to Wharton Business School professor Jeremy Siegel, between 1802 and 2006, a dollar invested in gold and adjusted for inflation would have grown to $1.95. That's right -- it would have almost doubled. But stocks would have turned that $1 into $755,000, while a bond investment would have topped $1,000.

Superinvestor Warren Buffett, when asked about gold at his latest annual meeting, explained that in his view, "Gold really doesn't have utility." He said he'd rather invest in businesses that produce goods instead: "[I]f you take all of the gold in the world and put it into a cube, it would be about 67 feet on a side and you could get a ladder and get up on top of it. You can fondle it, you can polish it, you can stare at it. But it isn't going to do anything."

So be smart about gold. Many investors quite reasonably avoid it entirely. If you opt to invest in it, do so in an informed fashion, and don't put all your eggs in it. And above all, don't fall for some scam artist appealing to your fear, greed, or interest in gold.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Check out her holdings and a short bio.

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