Conventional wisdom advises investing in gold to hedge against market declines. The value of gold generally goes up when stocks go down.
Since the start of the Great Recession, interest in gold has greatly increased among investors. In August, gold reached more than $1,900 per ounce, a record high. During the first eight months of 2011, gold increased more than 28 percent.
As prices continue to rise, the risk of gold scams increases. Regulators and industry groups, such as the Financial Industry Regulatory Authority (FINRA), the North American Securities Administrators Association (NASAA) and the Commodities Futures Trading Commission (CFTC) have all started to raise awareness regarding gold schemes and stocks.
The CFTC recently brought fraud charges against three companies that advertised ways for investors to purchase precious metals, such as gold, silver, and palladium, through leverage. Buying investments using leverage means putting up collateral and borrowing money to make the purchases. Also, buying gold or any other metal and taking possession of it can cost you not only in commissions but in outrageous storage fees.
In another case, a Florida firm cheated 1,400 investors out of $30 million without ever fulfilling a promise to buy gold bullion.
While the television advertisements promising great returns on gold sound may like good ideas, in many cases the entities offering these investments do not make good on their claims. It is imperative that one examines closely any type of gold offering before investing.
How can you determine if a gold investment is a scam? Linking a company’s stock performance to the price of gold serves as one indication. Such a correlation does not always make sense. Investors should be wary of schemes that warn the United States faces excessive inflation or total economic collapse. These types of investment opportunities simply appeal to people’s fears and do not provide any real protection from those concerns.
Similarly, if you worry about the economy declining or inflation, be careful about investing in gold at this time as gold has recently hit record highs. Any kind of run-up like we have seen has a propensity to undergo a massive correction.
Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.