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Gold has been prized for both its monetary value and its beauty for centuries. The yellow metal is also prized for its scarcity: All the gold in the world would form a cube roughly 75 feet high, according to the U.S. Geological Survey. And with inflation still elevated and the U.S. dollar depreciating, gold is being touted as a hedge to stay ahead of rising prices. The price of gold rose more than 50 percent over the last 12 months. It’s no wonder that the precious metal, which was selling for more than $4,000 per ounce on Oct. 7 for the first time, has become a hot commodity.
But investing in gold has two big problems: how to buy it and where to store it. When you buy gold, you must make sure that it really is gold, not painted lead, and that it’s the correct purity, as measured in karats (24-karat gold is pure gold; 18-karat gold is 75 percent gold). For that reason alone, the gold market has been rife with fraud. Mark Twain supposedly said that a gold mine was a hole in the ground with a liar standing next to it.
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Once you have your gold, you have to figure out where to store it. If you keep it at home, a thief could walk away with your investment. If you put it in a bank safe deposit box , you’ll have to buy additional insurance, because those boxes aren’t covered by federal deposit insurance. And if you have someone else store it, you’ll need to pay them for the service and make sure they are a legitimate business, not some guy with a very lucrative P.O. box.
When you buy gold, then, you have to be sure you’re getting gold, and you may also have to hire someone to protect it. Plus, throughout the transaction there are plenty of ways to spend more than you should — or get taken entirely. Here are some of the worst mistakes people make when buying gold, and advice on how to avoid making them.
1. Buying too much
Scammers prey on investors’ fear of financial ruin and their hope that one investment can save them. Gold, with its reputation as an inflation hedge, is just the ticket for stoking fear in investors as well as belief in the promise of outsize gains. The combo is a big hit for shady gold dealers but can be a disaster for you. Joe Rotunda, director of the enforcement division at the Texas State Securities Board, says that in cases of gold fraud, fear and greed often compel investors to sink a large percentage of their savings into gold. “These are not individuals who have a lot of assets — they are looking to preserve what they have and live a comfortable retirement,” he says. Instead of listening to your emotions, try to figure out whether gold would fit into your overall financial picture. Five to 10 percent of your portfolio may be about right, according to financial planners, but probably no more.
2. Overpaying
One of the biggest ways to take advantage of novice investors is to charge a big difference between the wholesale, or spot, price of gold — the price dealers pay — and the retail price. You can find the spot price online at many financial websites: Yahoo Finance, Monex and APMEX are three good places. On average, you should expect to pay between 2 and 5 percent over spot, according to precious metals dealer Kitco. Find a different dealer if you’re asked to pay more than that, and don’t get lured in by pitches for “special deals” from private mints.
3. Loading up on rare coins
Unless you love rare coins for their beauty and you’re extremely familiar with the market, stick with authentic bullion coins issued by the government. Rare coins can be hard to value and hard to sell. In addition, they can sometimes cost much more than their so-called melt value, which is their worth based on weight and purity if the coins were to be melted down. If you buy well-known government-issued gold coins, such as American Eagles, you’ll know exactly what you’re getting — and you can sell them easily through coin dealers. Although the U.S. Mint does not sell American Eagles directly to the public, you can find a list of dealers on the Mint’s website.
4. Hiring the wrong storage company
From a fraudster’s point of view, the ideal gold scam is to have someone send you money for gold you don’t have and never have to deliver. But a pretty good alternative is to get someone to send you gold that you have no intention of storing.
Many reputable companies will store your gold properly and securely, but if you decide to have someone store the gold for you, investigate the organization closely. Look for a company with a long operating history, Rotunda says, and check their record with the Better Business Bureau. You can also call your state securities commissioner, who can tell you whether the company has had any regulatory problems.
5. Insisting on physical gold
Several exchange-traded funds, or ETFs, invest exclusively in the yellow metal, and their share prices are pegged to the price of gold. Many gold ETFs are backed by physical gold held in vaults, but some rely instead on futures contracts to track the price of gold. Read the prospectus to understand how the gold ETF you’re thinking about investing in operates. ETFs are convenient because you can buy and sell shares at any time during the trading day, and you don’t have to figure out where to store your gold. You will pay an ongoing fee for the ETF’s services, and you may have to pay a brokerage commission to buy it, but remember, you would also pay commissions to buy physical gold and fees to store it. Be aware that some gold funds invest in gold mining stocks and not the metal itself. Again, always read the prospectus before investing. The prices of mining stocks can be far more volatile than the price of gold itself.
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