They were heavy—a single coin weighed about as much as a half-dozen quarters. But a stack of 14 didn't look much grander than the spare change on a dresser. It was hard to believe that this little pile of metal was worth $32,000.
Or was it?
Daphne Clark* bought the gold coins in December 2012. They were U.S. Saint-Gaudens Double Eagles, named after their designer, the sculptor Augustus Saint-Gaudens. Coin aficionados — numismatists, they're called — prize these $20 pieces, minted from 1907 to 1933, as the most beautiful American currency ever made.
Clark was no numismatist. A 50-year-old Denver-area small-business owner who considers herself a small-government-minded libertarian, she bought gold for its value, not its beauty: She was uneasy about the state of the U.S. financial system. A few years ago, she purchased shares of gold through a broker, but all she got was a certificate; the gold was in a vault in Australia. If something terrible happened to the economy, she wanted to be able to physically get her hands on her stuff.
A company called Merit Gold & Silver ran ads offering bullion for 1 percent over dealer cost. When she called, the salesman told her that collectible coins were a better investment, outperforming bullion by more than 2 to 1. And he said Merit could buy them back anytime, charging only that 1 percent fee. She bought 14 coins.
Six months later, Clark began to worry. The price of gold had dropped more than $300. The salesman had assured her that these coins would help protect her from short-term fluctuations. How much were hers worth now? She didn't know. She had never received condition reports from Merit, just an invoice. And when she opened up her safe-deposit box and inspected her hoard, she saw that all the coins had different dates, and they looked dull and worn. Although Clark called Merit repeatedly to ask about this, she kept getting sent to voice mail.
Her fears were confirmed when she had the coins appraised at a local shop: Instead of 1 percent over cost, she'd been charged $600 more per coin, and more than $8,000 in total — a 35 percent markup. And as the price of gold plummeted, the value of her investment kept melting away.
Online, she found that several customers were suing Merit for deceptive marketing. Later, she learned that the Santa Monica, Calif., City Attorney's Office had launched a consumer protection lawsuit against the firm, alleging it engaged in an "aggressive, nationwide fraud scheme that has bilked consumers out of tens of millions of dollars."
She felt sick. Not only had she been duped, but she'd walked right into one of the oldest cons in the world.
The rare metal prized by the ancients has long enticed certain investors, especially those who view the current financial system, and the governments that oversee it, with mistrust. In a world of complex and exotic investment options, gold, silver and other "hard assets" are seen as something solid and real, with inherent value that no market crash or federal mismanagement can erase. That image was burnished during the Great Recession, when the price of gold skyrocketed, peaking in 2011. Prices plunged as the economy continued to recover. But in 2016, gold has climbed 25 percent so far, fueled partly by economic fears following Britain's vote to leave the European Union.
Investors who want to get into gold and silver have many options, including purchasing mining shares or buying into a fund that tracks the metal's price. But many buyers prefer physical bullion — the bulk metal, valued by weight, and cast as bars, ingots or coins. Collectible coins have an additional aesthetic or historical value and are usually sold by dealers. That can spell trouble. "Because there's so much subjectivity in the value of coins, it's always ripe for deception," says Dama Brown, regional director of the Federal Trade Commission's (FTC) southwest division.
See also: How to get the best financial advice
Fraud activity tends to follow market prices. Reports of gold and silver scams fell significantly in 2014 and 2015, when metal prices sank. It's hard to find reliable overall national statistics, but a 2014 report from the U.S. Senate Special Committee on Aging estimated that more than 10,000 Americans have been victimized by precious metals cons, with losses of around $300 million. True losses are likely higher because many victims don't know they've been duped.
Financial adviser Ric Edelman, host of public TV's The Truth About Money With Ric Edelman, hears from two main breeds of goldbugs. The first group is fueled by ideology: "They are convinced that policymakers are destroying the country, U.S. currency will be worthless and the only thing that will have value is gold," says Edelman. Others — often retirees — are investors who lost money in the recession and are reaching out to gold for the illusion of safety. "They are not sophisticated investors, but they do know what their fears are. And they are easily victimized by sales pitches."
Gold and silver dealers often advertise heavily on media outlets aimed at older Americans (see "Editor's Note" below). Retirement-age investors can be especially receptive to the idea that metals are a bulwark against economic instability. According to several lawsuits alleging deceptive sales tactics, many dealers exploit buyers' inexperience by pushing them to purchase collectible coins over bullion, often with the promise that coins can be sold back to the original seller at any time. Salespeople may also claim that coin sales are not reportable to the Internal Revenue Service and are untraceable by the government; neither is true. "They sell the coins with huge markups," Edelman says. "These buyers have no idea of the economics involved. They don't realize there is nobody out there willing to buy these coins."
Customers of California-based Goldline International learned that the hard way. In 2012, the company settled a 19-count criminal fraud complaint brought by the Santa Monica city attorney. In it, Goldline was charged with concealing markups and telling buyers that the government could confiscate their gold bullion, a tactic designed to stoke privacy fears and encourage investors to buy numismatic coins, which Goldline claimed were untraceable and immune to seizure. The company agreed to refund up to $4.5 million to buyers and to have a court-appointed monitor track the company's sales practices for several years. The criminal complaint was dropped as part of the settlement; Goldline remains in business today.
Not so with Merit Gold & Silver: From 2010 to 2013, Merit took in an astounding $1 billion, then went out of business in August 2014, after a lawsuit filed by California authorities got underway. "It was a bait and switch operation, pure and simple," says Adam Radinsky, head of consumer protection at the Santa Monica City Attorney's Office. "They advertised gold bullion at 1 percent over cost, but the alleged salesmen switched [buyers] to numismatic coins with a much higher markup, often without the customer realizing it."
Radinsky's office has targeted several gold companies based in Southern California. "We police the false advertising that takes place in our backyard," he says. "These are not easy cases to bring, and the sales tactics are tricky. But there are a huge number of consumers being misled in this industry."
The difficulty in going after coin dealers stems in part from the ambiguous nature of the scam. "A lot of the numismatic-coin claims seem to make sense, so it's not like some kinds of fraud, where someone just gets ripped off and knows it right away," says Radinsky. "Many consumers don't realize they have been misled."
More than 200 investors filed claims with Santa Monica authorities as part of the Merit lawsuit, which was settled in June 2015 with a $2 million judgment entered against the company. Several private parties filed separate civil lawsuits against Merit, including a 77-year-old man who claims he purchased between $3.6 million and $4 million worth of gold coins from Merit at what he believed to be 1 percent over cost, only to learn the coins were worth around half that.
Attorney Ricardo Cestero, who represents Merit co-owners Peter Epstein and Michael Getlin, denies that the company engaged in bait and switch tactics. "An important point that Mr. Radinsky glosses over is that neither Mr. Epstein nor Mr. Getlin was ever charged with a crime," he says. Both were dismissed from the case as part of the settlement and did not admit wrongdoing.
Four salespeople provided sworn testimony in the Merit case. One was a 49-year-old man we'll call Thomas, who spoke to AARP under condition of anonymity. He says he worked for Goldline and then Merit from 2009 to 2012. "I knew nothing about gold coins when I went to work for Goldline, just like the 200 other salespeople who worked with me," Thomas says. "It was a sales boiler room."
In calls taped by Radinsky's office, Merit salespeople revealed how they steered buyers into collectible coins. The commission structure encouraged this, says Thomas. "Someone wants to buy $10,000 worth of gold. If I sell them bullion, I make $50. If I switch them to supposedly rare and more valuable numismatic coins, I make $1,000. It doesn't take a genius to figure out where to lead customers." The 1 percent markup Merit advertised applied to bullion only. Internal pricing sheets provided to prosecutors show that the difference between the "bid" (what Merit told employees it paid for coins) and "ask" (selling) prices was about 33 percent.
Cestero dismisses this account. "A lot of people can claim to be a former employee," he says. "What he is saying is absolutely false. All salespeople were instructed to sell bullion and as much bullion as they possibly could."
Radinsky's analysis of Merit's sales suggests otherwise. The prosecutor estimates that about 97 percent of the company's gross profits over four years came from coin sales, not bullion. So steep was the company's markup, says Thomas, that even those who bought gold while prices were on the rise would be unable to recoup their purchase price. "I never saw one client profit from their purchase. No one made a penny except the companies I worked for."
In his 40-something years as a coin dealer, Michael Fuljenz has heard a lot of stories about deception and high-pressure tactics. But he insists that only a small percentage of sellers are unscrupulous. "Some new buyers don't know what to look for," says Fuljenz, who owns Universal Coin & Bullion in Beaumont, Texas, and consults for three other companies. "They want to dabble in [gold], but they don't know how. And they tend to look at all coin dealers as being similar. They are not."
See also: Five misleading investment pitches
Markups aren't the only way to lose big by buying coins, he adds. Consumers can be fleeced by dealers selling counterfeit coins that contain only a fraction of gold or silver content, for example, or by dealers who simply take buyers' money and don't deliver the coins. In June, the FTC charged California-based Discount Gold Brokers, which advertised on national media outlets such as CNN and Fox News, with ripping off millions of dollars from customers who allegedly never received their orders.
Fuljenz also warns of scams targeting those trying to sell their coins, such as "hotel buyers" — itinerant dealers who set up in hotels, buying up coins at reduced prices and then moving on before the deception is detected. Others offer "free appraisals," he says: "They pick up their coins, then you never hear from them again."
All this activity goes on in a lightly policed regulatory environment. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the U.S. Commodity Futures Trading Commission jurisdiction to prosecute firms that sell interests in precious metals to investors through financed arrangements, but the law doesn't cover dealers who sell physical coins or bars at full price. And with financed sales, the law excepts dealers who deliver the physical metal within 28 days of purchase — a loophole that means no one agency has specific jurisdiction over the physical precious metals industry. "Until additional laws are passed to regulate these guys, these practices will continue," says Radinsky. "It's like the Wild West out there when it comes to coin sales."
But the industry has resisted efforts to tighten regulations. "It hurts the honest dealers," says Kathy McFadden, executive director of the Industry Council for Tangible Assets, which represents dealers of rare coins, paper money and precious metals. "To the people who are not on the up and up, it doesn't matter how much legislation or regulation you put in. They are going to wiggle their way around it." In other words: Buyer beware. "Consumers need to do their due diligence," she says, "just as they would if buying a car or asking a contractor to come into their home. There is no difference."
To limit risk, most financial advisers who think precious metals help diversify a portfolio say that the most you should invest is 5 percent of your holdings. Many also suggest buying shares in an exchange-traded fund that tracks the price of gold, allowing investors to avoid paying for the shipping and storage of gold in coins or bullion.
If you do buy physical gold, experts stress the importance of working with registered brokers, dealers accredited by the Professional Numismatists Guild (PNG), or financial advisers who are registered brokers. "Novice investors really do have to be shrewd and do a lot of research," says the FTC's Brown. She also recommends contacting your state attorney general's office to see if the company has any enforcement actions against it.
Most critically, avoid any company that cold-calls. "If someone calls you whom you never did business with, just hang up," says Fuljenz. "I don't know any legitimate [precious metals] companies that cold-call."
Buying numismatics can be particularly perilous. Dealer Jeff Garrett, of Mid-American Rare Coin Galleries in Lexington, Ky., and coauthor of the Encyclopedia of U.S. Gold Coins 1795-1933, says it's like buying a racehorse — not something you do over the phone. "There's a saying: 'Buy the book before the coin.' So go educate yourself," he advises. "Buy a book about rare coins. You also need to find a mentor who's really an expert in rare coins, and vet his credentials." He suggests contacting a dealer who is a member of the PNG.
Financial adviser Ric Edelman's recommendation: Call someone like him. "We tell people what the sales guys don't tell them about gold — about the markups, the fees," he says. "We help them understand that if their goal is to protect their money, this is not the way to accomplish it."
And if a salesperson pitches you a can't-lose offer on the metal that has beguiled the unwary for millennia?
"You have to ask yourself," Edelman points out, " 'Why are they selling it to me? Why aren't they hoarding it for themselves?' "
*Name changed at the request of the victim.
The AARP Bulletin and AARP The Magazine accept advertising from gold and silver retailers. Companies wishing to advertise precious metals in AARP media are required to submit documentation requested by AARP for its review prior to approval, and to work directly with AARP if consumer-related issues arise with its members. Current advertisers are periodically reviewed to ensure continued compliance with rigorous AARP guidelines, which include following all federal and state laws and regulations. We recommend that those interested in purchasing bullion use registered brokers; for collectible coins, contact a dealer accredited by the Professional Numismatists Guild (pngdealers.org). For a dealer locator, go to the United States Mint (usmint.gov).
Doug Shadel is state director of AARP Washington. Former Center for Public Integrity reporter Joe Eaton teaches investigative journalism at the University of Montana.