Throughout history, gold was a prized commodity because its value did not change. Many people chose to invest directly in gold in the same way today’s investors do in the stock market, real estate, and other tangible assets that can appreciate (or depreciate). It was a good investment that could withstand market fluctuations and other financial uncertainty. While stock prices could drop and real estate depreciate, the price of gold still rose. Because of this immovability, gold was considered a global currency.
Today, while gold retains its value, so many alternatives like cryptocurrencies, stocks and shares are available that few consumers prioritize investing in gold. While some investors seize the opportunity to invest in a rare commodity, others have avoided gold in favour of other options.
Like any investment with the potential to generate huge returns, investing in gold can be risky, and gold scams abound. The information below details the importance of gold, how gold scams work, who is being targeted, and how to avoid being scammed. You will also learn about some of the most infamous gold scams.
The Importance of Gold
Gold is more than a precious metal we wear as an adornment. In fact, a ‘gold standard’ was used to define world currencies’ value between the 1870s and the early 1900s. Many countries around the world — including the US — used the gold standard; that is, their currency’s value was based on the value of a certain amount of gold. However, by World War I, many had abandoned the gold standard, and printed more money to pay for the war, which in turn caused inflation.
The US was one of the few countries that continued using gold to back its currency into World War II. Then a new system where the US dollar was backed by gold — called the Bretton Woods system — developed, and other countries in turn valued their currencies based on the US dollar. This system had also been abandoned by the early 1970s due to trade deficits and US budget issues. Since that time, most currencies have floated freely in the market.
How do gold scams work?
Many consumers want to invest their capital for high returns, which means they can fall prey to gold investment scams. It is understandable that someone who wants to make millions might listen to a broker who promises easy money on an investment deal that seems too good to be true. Unscrupulous brokers have also improved their techniques for attracting unsuspecting, novice investors, so prospective consumers should look out for the following types of scams they might find in the gold market.
While it seems impossible, some investors have been duped into buying fake gold. Scammers have perfected the shape and consistency of gold to make coins or bars look like the real thing. They have achieved this by simply mixing various metals that mimic gold’s shape, colour, and weight. However, upon closer examination, the structure and material of the gold piece reveal it is not genuine.
The inheritance scam
This is a version of the classic ‘bait and switch’ scam, where the unscrupulous broker will tell an investor they have ‘just inherited a ridiculous amount of money and gold’, and there is always a glitch where the broker needs a partner to move the money into an account, then to family overseas. The unwitting victim may see this as a chance to make money from the partnership and gives the broker money. Once the investor has handed over their money, they have no recourse in the event the scammer’s family members ‘cannot access the cash’, which is what happens most often. By the time many victims realize they have been scammed, the broker has made off with their money.
The gold company that disappears overnight
In this scam, the broker convinces investors they can purchase gold at a lower than market price. The consumer pays for the gold but never receives it. When the buyer calls the broker’s phone number or sends an email, they receive a message that the number is no longer in service, or the email address is no longer valid.
Gold coins not worth collecting
Coin collecting is a hobby for many, and this presents fraudsters with another opportunity to dupe unsuspecting consumers. Coin collectors often purchase limited editions, or coins with ornate, unusual designs, symbols, textures, and shapes. Scammers take advantage of this by advertising they have rare gold coins for sale. Collectors who cannot tell the difference between quality gold and mixed metal coins often pay more than the coins’ value.
Fake gold coin storage sites
Gone are the days when people commonly kept a safe at home, but some still do. The natural inclination for someone with a sizeable gold coin collection is to store it somewhere safe, possibly outside their primary residence. After convincing the buyer to purchase coins, dealers convince them to store the coins in escrow to avoid losing them in a natural disaster or some other unforeseen event. The owner hands over their gold coins, and that is the last they see of the dealer. In either case, the gold collector never sees the coins they purchased and had stored because the scammer disappears.
Companies provide fake documents or forms that have been tampered with
Technology has meant so many breakthroughs, but in this case, it has impeded securing financial transactions. In this scam, technology is used to copy documents or create fakes, and copy and paste signatures right into them. Information such as the date is also changed, along with the coin descriptions, which denote a coin’s value based on how much gold it contains. A Mint State (MS)-70 coin, for example, is much more valuable than an MS-60 in good condition. Unfortunately, novice collectors may not notice the difference, and accept the forged documents as real, possibly paying more than required.
Who are gold scammers targeting?
While no one is immune, gold scammers typically target a few populations such as senior citizens. In today’s highly digitized economy, older people may not be familiar with the different ways fraudsters trick them out of their income. They may also be seen as having lower financial literacy.
Another group scammers target is people who might be struggling or have significant debt. They know gold can be a long-term investment (and it is when dealing with a legitimate broker). Unlike senior citizens, this demographic is broader because it comprises people from every area of society.
How to Avoid Gold Scams
There are four factors for investors to consider when purchasing gold. The first is the market price for any metal (in this case, gold) they want to sell or purchase. Traders should also immediately avoid high-pressure selling tactics that force them to wait for the commodity’s price to double (or even triple) before making a profit.
Each coin also has a unique design that is impossible to duplicate. When purchasing coins, make sure each detail appears as it does in a genuine coin.
Investors should also know how the jeweller measured the gold. The international market standard is Troy Ounces (OZT); dealers and investors also refer to OZT when discussing weight. Incidentally, OZT (31.1 grams) are not the same as standard ounces (28 grams).
Finally, verifying whether a coin is gold is done in one of two ways. The first involves the ‘ping’ sound that results when a coin has been struck. It should produce a long, high-pitched ringing sound instead of the dull sound other base metals make. Authenticity can also be verified using a magnetic test that checks the metal’s magnetic strength to see if it is gold (gold is magnetic, so it will be attracted to the magnet).
Famous Gold Scams
The above scams pale in comparison to some of the biggest in history. Here are the top scams that made Trustable Gold’s list.
PIM Gold is believed to have swindled investors out of up to $155 million. As of July 2021, authorities estimated between 7,000 and 8,000 investors had lost money when the German firm became insolvent and had only been able to meet 7.5 per cent of creditors’ claims. PIM was accused of failing to meet contractual obligations — including bonus payments — to customers between 2016 and 2019. Authorities also believe interest payments were taken from newly recruited customers’ funds.
The Commodities Futures Trading Commission (CFTC) and 30 US states accused TMTE Inc., a US-based precious metals company, of defrauding around 1,600 senior citizens of up to $185 million. TMTE allegedly achieved this by inflating precious metal prices to up to 300% of market value. Fox News viewers were targeted and persuaded by misleading websites, politically themed social media ads, and high-pressure phone tactics.
This US-based company was accused by the CFTC of defrauding consumers through a multi-million-dollar precious metals scheme. Investors lost up to $290 million in commodity trading pools through the Atlas Program, where they leveraged trades in gold and other precious metals after being persuaded Atlas was a safe, secure, and profitable method of investment.
Investing in gold is a good way to put your money in a vehicle that can withstand market and economic uncertainty. Because of its stability and appreciation properties, many — including unscrupulous dealers — will naturally flock to gold. That said, education is a key component in avoiding being duped as a gold investor. There are several reputable gold trading platforms that list all current scams, as well as articles about learning to become an expert in valuing gold and spotting a scam. It only takes a few minutes of online research to negate months, and maybe years, of anguish due to being scammed.