Not All That Glitters is Gold

By Anna Pierlussi

Every time the price of gold bullions hits a record high, the interest in investing in gold skyrockets. TV campaigns, radio advertisements, blogs, and many other social media channels will often aggressively promote investing in gold. The problem is that most of the stocks and opportunities promoted do not involve a direct investment in gold. In fact, many of the stocks being promoted are owned by gold mining and exploration companies with little value, while others are outright frauds.

Because gold has historically maintained or increased its value, buying gold seems to be a smart way to help hedge against inflation and economic fluctuation. However, while gold can certainly be used to diversify one’s portfolio, it is critical for investors to understand that the gold market fluctuates even more than the basic stock market which can mean increased risks. Also, the gold market moves in reverse of stocks and bonds: if stocks are down, gold will be a tempting investment.

Gold can be purchased in a variety of forms such as: purchasing actual gold i.e. bullion and bullion coins (a bulk quantity of the precious metal, assessed by weight and typically cast as ingots or bars); collectible coins (with some historic or aesthetic value to coin collectors and a market value that usually exceeds their face value or their worth in metal); gold-related investments such as mutual funds and exchange-traded funds; futures; and gold mining companies.

In regards to mutual funds, investors should keep in mind that even if mutual funds have gold in their names, none of them will actually have more than 10 percent of assets invested in the metal itself. By law, mutual funds must earn 90 percent of their income from securities. An investor seeking to invest in gold through mutual funds or an exchange-traded fund, should find out exactly how the fund invests in gold, what the hidden costs are, and what the applicable taxes are, which combined could dilute the holder’s interest in gold.

Furthermore, the biggest scams have involved gold mining companies. Such gold scams center on inflated claims regarding the stocks of gold mining companies whose stock value is usually based on gold reserves that are difficult to estimate, much less verify. Investors should be aware of “shell” mining companies, in which a company represents that it is in the gold mining industry when actually it exists solely to raise investor funds for fraudulent purposes.

The Financial Industry Regulatory Authority (FINRA) has recently identified the following warning signs related to purchasing gold stocks:

  • price targets or predictions of swift and exponential growth;
  • references to being a “buyout target” for other mining companies;
  • claims that tie stock performance to the general rise in gold prices;
  • scare tactics such as the threat of inflation or an economic meltdown;
  • a change in the company’s name or trading symbol to align it more closely with gold; and
  • speculative claims based on a new reserve’s proximity to an existing reserve.

By all means, this alert does not imply that investors should never buy or invest in gold. Whether you are buying gold stocks and funds, bullion and bullion coins, or collectible coins, keep in mind the warnings above, and do your homework. A savvy investor would not put all the “golden eggs” in one basket especially given the fluctuation of the market of this precious metal. Consult with a reputable dealer or financial advisor with specialized knowledge and obtain independent appraisal of the specific gold product you’re considering. Do not forget hidden costs and applicable taxes that may off-set any potential earning. Last but not least, beware of “exploration” companies asking for action now, and offering official-looking geological surveys or financial statements, when in reality there is little or no current production, just an appetite for new money.