Gold investors got a dose of reality last week. After soaring to more than $1,900 an ounce early in the week, prices collapsed in heavy trading on Wednesday, falling as low as $1,697.
Investing in gold is like anything else; prices will fluctuate. But an increase in prices that has been seen in the past five years — from $598 to $1,917 — has many unintended consequences.
The Financial Industry Regulatory Authority last week issued an alert warning unsuspecting investors to be cautious and aware a growing number of scams linked to gold and other precious metals.
“Con artists are using the run-up in the price of gold as a hook to part investors from their money," said Gerri Walsh, vice president for investor education at FINRA. "Investors should think twice before investing in any gold investment promising exponential returns, or any company that claims it is a buyout target for other mining companies.”
The U.S. Commodity Futures Trading Commission earlier this year filed charges against a company based in Orange County, alleging it “cheated and defrauded customers and prospective customers of at least $4 million since 2006 by misrepresenting the likelihood of profit and concealing the near certainty of loss.”
Interestingly, the losses came at a time when gold and other commodity prices were rising. The losses suffered by investors in the alleged schemes came in the form of excessive commissions. The Commodity Futures Trading Commission claims that 63 percent of the money raised from investors was diverted to the company operators in fees and expenses.
Making the matter worse, nearly half of the funds invested in the bogus program came from individual’s retirement accounts where losses totaled more than $1.9 million.
“Con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” said David Massey, president of the North American Securities Administrators Association.
The group of state securities regulars in the U.S. and Canada just issued its list of the top 10 investment scams for 2011, and precious metals fraud was high on the list.
It identified a situation in Florida where more than 1,400 investors lost $29.5 million. Regulators said Gold Bullion Exchange used a sophisticated telemarketing operation to purportedly purchase precious metal bullion with leveraged financing.
Despite having paid commissions and fees of up to 18 percent for their precious metals investments, investigators determined that no bullion was ever purchased.
Another alleged scam reported by the Securities and Exchange Commission involved a classic “pump and dump” scheme. The SEC charged two operators of a purported mining company of touting shares of the company to investors by issuing a series of false press releases and other misleading public statements.
They claimed to be operating a mining project in Ecuador with a gold reserve worth $1 billion and were looking to purchase additional mines in Arizona. The SEC said the operators never developed mining projects and never were in a financial position to do so.
However, they were able to inflate the value of the company’s penny stock and sold half a million shares in unregistered transactions, pocketing at least $17,500 from the sale of the securities.
FINRA warns investors to be leery of claims that tie stock performance to the general rise in gold prices. It also warns to avoid offers that use scare tactics, such as the threat of inflation or an economic meltdown.
Bottom line: No one knows where the price of gold or other commodities may be headed. But using common sense and dealing with creditable financial advisers and companies can prevent investors from losing money in a scam or fraud.