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Gold scams: what are they and how can they be avoided?

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The importance of gold as an investment vehicle

Before delving into the world of gold scams, it’s a good idea to become familiarised with gold’s current general position in the investment landscape. It may be hard to believe in the modern age, but it actually wasn’t all that long ago that gold was a key part of the investment world. In the early part of the 20th century, the “gold standard” was a system which allowed currencies to be pegged to the value of gold, rather than “floated” freely on the market as they are today. Gold was considered a commodity with an almost immovable value, and something that was worth investing in directly.

These days, the situation is different. Gold is the sort of commodity that few people now choose to prioritise. Buying blocks of gold and storing them in a bank vault seems almost foolish given that there are so many investment alternatives on the market, including everything from cryptocurrencies to stocks and shares. This has had a number of mixed effects on the gold market: it has in some cases made it more likely that people will invest in gold in order to take advantage of a rare and uncommon commodity, while it has also turned some people away. For scammers, the esoteric and unusual nature of gold means that there’s a perfect opportunity to spin a yarn.

Why investors get fooled

In the public mindset, those who purchase gold are almost always people who are sophisticated or rich. And this is probably true: the price of gold does rest at around £1,257.80 at the time of writing, and its status as a natural product means that its scarcity is permanent and its supply is fixed – which in turn keeps the price up, and means that only those who have disposable income can purchase it. However, that’s no defence against scams. The world of the Internet has meant that nobody is immune: the rise of online content has meant that narratives about gold are everywhere, and anyone who is in a position to buy gold can be fooled.

Political and economic instability has also fuelled gold scams. In a world where jobs are no longer for life and the outcome of traditional investments such as pensions and house purchases can seem in jeopardy, turning to something scarce is appealing for obvious reasons. Those who peddle gold scams often hark back to the good old days of the gold standard, and evoke imprecise but persuasive “memories” of days in which the dominant global economic system was more stable and friendly to investors.

Who are the likely victims?

Looking into who is a likely victim of a gold scam is an interesting sociological exercise given that there are many different types of people who can easily fall victim. In general, those who fall victim to this particular investment scam are people who are interested in breaking the mould in some way, or of opting out of the dominant modes of savings and investments.

Gold has a particular historical resonance given its history as a source of solid, continuous value. The Internet posting forum website Reddit, for example, has a sub-Reddit devoted to gold which has around 18,000 members. While it’s certainly not the case that everyone who is interested in the world of investing in gold is someone who could also be vulnerable to falling victim to a scam, the level of interest in gold reflects the size of the potential pool of people who could fall victim.

The evidence around gold scams also goes to show that some demographic groups can be particularly at risk. A major recent news story from Hong Kong, for example, revealed that a man aged 85 saw a loss of around $580 million Hong Kong dollars during a recent scam – a figure which at the time at least was equivalent to around $74 million US dollars. For older people, the risk of gold scams is often doubled: its historical value means that they are acutely aware of its potential as a store of value, while the relatively low level of financial literacy that many older people have in a highly digitalised economy means that they’re extra vulnerable.

And yet another type of person who might be implicated in this scam covers those who is suffering from the worsening, less stable and more dynamic global economy. This is perhaps the broadest category and one which is not unique to gold. However, gold, in particular, offers an appeal because it is seen as long-term security. For a person who may be over-indebted on a mortgage or facing a move to a zero-hours contract at work, investing in gold is usually seen as a way to secure the future – and this is certainly something that many unscrupulous gold dealers choose to emphasise.

It’s also worth briefly considering who the likely perpetrators can be, too, as this can shine a light on who the potential victims might be. In the case mentioned above regarding the man from Hong Kong who was scammed, the perpetrators were not just organised crime professionals. A statement from the police published in the South China Morning Post revealed that actually there were several different types of person on the suspect list – including investment professionals. “They included the alleged masterminds of the fraud syndicate, former and current directors of three investment companies involved, brokers, and holders of bank accounts used to collect the proceeds of the scam,” it read. What this suggests is that, in some cases, victims of gold scams could even be people who are involved in the industry themselves – and could fall victim to their once-legitimate colleagues turning against them.

In short, there is no stereotypical gold scam victim. Victims of this particular variety of investment scam are often in a position where they want to get some economic or financial security, and that could be anyone. What unites them all is that they want to fairly and squarely profit from gold as a result of its unusual status, but end up failing to do so due to the unscrupulous actions of others.

What happens during a gold scam?

Creating the right image is a key part of any gold scam. Gold evokes a series of associations in the mind of most people: it’s a mark of top quality, for example, and it’s often seen as the hallmark of luxury. For that reason, gold scammers tend to create materials such as websites which are designed to perfection: from the point of view of the scammer, this is a worthwhile investment because it creates a powerful feeling in the victim’s mind.

Common design tricks used by gold scammers designing websites are numerous. Photographs and videos of the sort of high-end products which the scammer wants the victim to believe they will be able to buy if they fall for the gold scam are common, and these could include everything from fast cars to mansions. Fake quotes are also common: often these are supposedly from other consumers who are in the same position as the potential victim, or perhaps from experts. However, they are very easy to create and falsify – so you should never treat them as automatically trustworthy.

In terms of the mechanics of the scam, the most basic version sees the victim solicited to purchase gold in a transaction which they think is standard – but which is actually fraudulent. If the fake marketing works well without any additional need for the scammer to intervene, the victim may place a cash transaction which will supposedly be met with the receipt of gold: however, the gold of course never arrives. Sometimes, the scam seller will enhance the story with some particular details: they may supply a fake address of a bank vault in which the reserved gold is currently being held for security purposes, say, or indicate that it is only able to be collected after a certain period of time.

Sometimes, it will quickly become obvious if the client is not able to access the gold that they have been told they can access. If they try to get physically get hold of their gold from the account in which it’s been kept, they’re likely to find out as soon as they try that the gold isn’t real. However, on other occasions scammers are able to evade detection for many years, and create a long-term illusion that the value of the gold is rising when in fact the gold did not exist in the first place.

This long-term nature of the scam is inherent to the nature of gold as a commodity, and as a physical object which must be kept secure: many investors in gold buy it for its offer of long term security. Unlike some other investment vehicles which can be day traded, such as stocks and shares, gold is usually only ever bought because of its long term potential for value realisation. If a gold scam has occurred, it’s possible that they will not actually discover the scam for years on end when they eventually try to liquidate their asset. By then, the person behind the scam is probably far away and long gone.

Finally, it’s important to also become familiarised with the risk of “dirty gold”, as it is known. Dirty gold refers to forged gold, or gold which is real but has been stamped with brand markings that claim to authenticate it but which in fact are fake and hence offer nothing of value to the gold’s buyer. This is the sort of problem that is largely exclusive to “real”, tangible assets such as gold, given that they need to be physically validated by an expert. But for a gold trader, it could prove highly problematic when the time comes to liquidate the gold asset and sell it on. A recent article in Reuters, for example, pointed out that over the course of the last three years alone the problem of forgeries has faced around $50 million dollars’ worth or more of the bars of gold found in bank vaults and at refineries. In that particular case, the gold was sealed with the brand of major Swiss gold refiners, but it all turned out to not have been refined where it said it had.

Some tips to avoid gold scams

It’s important to remember that there are still ethical gold sellers out there: while the jury is still out on whether or not investing in gold is a good idea or not from a financial point of view, from a legal point of view it’s definitely the case that a proper gold dealer can sell the real deal. If a person is planning to buy gold, it’s worth them doing lots of market research to discover a dealer who won’t let them down. Speaking to others who have traded in gold or similar commodities is a good idea, and the Internet is useful here. By joining forums for gold dealers, traders will be able to swap recommendations for brokers and help keep the gold trading field clean.

It’s also worth exercising the same sort of caution and due diligence that a person might choose to use in any other financial transaction. If a trader is introduced to an organisation which claims to sell gold, they shouldn’t forget to research it and check out whether or not others have made the leap with this particular organisation. Remember that reviews on the Internet are not always very accurate, and that sometimes scammers can flood the web with fake reviews for their brand. A firm with all-recent reviews might well be a scam organisation, as might a firm which can’t demonstrate membership of any relevant industry bodies.

Don’t forget, too, that the scarcity of gold gives traders an advantage if they’re trying to fight scammers. A legitimate gold dealer will always be in high demand given that there is so little gold in the world compared to the number of people who are interested in buying it. If a gold dealer comes to a potential buyer and promises a great deal, the buyer should ask themselves a simple question: why is this person, who operates in a high-demand and low-supply market, having to go out and hustle for work? By sourcing a gold dealer using a recommendation or Google, the buyer can completely remove the risk that a scammer will approach them.

The takeaway

  • Gold is an unusual commodity in many ways, and one which has a peculiar historical resonance. It used to be the world’s standard for value but has now become less useful for that purpose. It is bought and sold speculatively by those who want to store away the value of their assets, although its price can still fluctuate.
  • The supposed security of gold means that it can appeal to many people. Those who have lost out in the modern world, perhaps through house price declines, may see gold as a good option. Older people could be at risk, especially if they are vulnerable or isolated. Those who have political objections to the dominant global economic system in which assets like stocks and shares and other financial services dominate the agenda, meanwhile, may find themselves trading gold. Wherever there is demand for gold, there is unfortunately also fertile ground for gold scammers. And even those who work in the gold or wider investment industry can be scammed, as there is evidence that some scammers are themselves investment professionals.
  • This type of investment scam often sees the victim place a trade and commit to buying a particular amount of gold in a certain location. When they come to sell on the gold, they will find that it doesn’t exist – and the long-term nature of a typical gold investment means that the person who orchestrated the fraud is now far away. Other gold scams include the proliferation and sale of “dirty gold”, which is either fake gold or real gold that has been authenticated as refined using a fake stamp. These scams are getting increasingly sophisticated, and evidence shows that millions of dollars’ worth of gold could be “dirty” in this way.
  • Avoiding gold scams is not easy, but it’s certainly possible to do so. A trader should always be sure that they are plugged into the wider gold trading scene. They may be able to confirm the veracity of their gold dealer by speaking to other traders in forums, for example. Researching the background of anyone selling gold is also worth doing – and seeing if they have multiple long-term reviews, or belong to a trade body, is a smart idea. And it’s also worth approaching gold dealers directly rather than having them reach out.