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Exercise Caution When Buying Gold

Exercise Caution When Buying Gold

As with any investment, do your homework and get trusted advice

September 1st, 2012 by Mark Huffman of ConsumerAffairs in News

Consumers who purchased gold three, four or five years ago are probably very pleased with their investments. Gold prices have climbed sharply since then.

But the commercials are still on TV, urging you to buy gold now to protect yourself against the declining dollar. It's interesting, however, that the companies selling the gold are perfectly willing to accept your declining dollars in exchange for their gold, but that's neither here nor there.

Gold has been gaining again in recent weeks on the growing belief that the federal reserve would launch another round of stimulus, which is another way of saying expanding the money supply. While the inflationary effects of that policy haven't shown up everywhere, they have definitely shown up in the price of gold.

Advice from the FTC

What does the U.S. Federal Trade Commission (FTC) say about buying gold? In a nutshell, it says "be careful." It advises consumers to do some digging -- not for the precious mental but for information about it -- before making a purchase.

The questions that have to be considered are how much gold to buy, in what form, at what price, and from whom?

The FTC warns that some gold promoters don't deliver what they promise and may push people into an investment that isn't right for them. While the commercials on TV push gold in the form of coins and bullion, that may be the most expensive way to buy it. With coins, especially, there can be a significant mark-up from the price gold is traded on the exchanges.

Gold stocks

Buying stock in a gold mining firm or buying into a mutual fund that invests in gold bullion is a common way to invest in gold. Most brokerage firms buy and sell these financial instruments.

Gold stocks and mutual funds may offer more liquidity than actual gold, and there's no need for an investor to store or protect gold investments purchased in this form. That said, any gold stock or mutual fund investment may carry inherent risk and may drop in value regardless of the price of gold.

Gold stocks and funds should only be purchased from licensed commodity brokers. You can check the registration status and disciplinary history of any futures firm or broker by contacting the National Futures Association.

Universal truths

Regardless of the form of gold you may invest in, the FTC says you should consider these universal truths:

The price of gold fluctuates over time. There is no guarantee that gold will increase - or even maintain - its value.

The prices coin dealers, banks, brokerage firms, and precious metals dealers charge for gold products, like bullion and coins, are almost always higher than the value of the gold the products contain. So it's wise to compare prices before making a purchase.

Some sellers say that the government may confiscate gold. Others say that "reportable" transactions lead to confiscation. Yet other sellers claim that modern bullion coins produced by the U.S. Mint are subject to confiscation while historic or collectible coins aren't. These claims sometimes lead people to buy historic coins at prices that exceed their value. No current federal law or Treasury Department regulation supports any of these claims.

Investigate Before You Invest

Whether you are buying gold stocks and funds, bullion and bullion coins, or collectible coins, the FTC says it's critical to do your homework first. If you are buying bullion coins or collectible coins, ask for the coin's melt value - the basic intrinsic bullion value of a coin if it were melted and sold. The melt value for virtually all bullion coins and collectible coins is widely available.

Consult with a reputable dealer or financial adviser you trust who has specialized knowledge. Get an independent appraisal of the specific gold product you're considering. The seller's appraisal might be inflated.

Consider additional costs. You may need to buy insurance, a safe deposit box, or rent offsite storage to safeguard bullion. These costs will cut into the investment potential of bullion.

Walk away from sales pitches that minimize risk or sales representatives who claim that risk disclosures are mere formalities. Reputable sales reps are upfront about the risk of particular investments. Always get a receipt for your transaction.

Refuse to "act now." Any sales pitch that urges you to buy immediately is a signal to walk away and hold on to your money, even if they are dollars that are "declining in value."