"Gold" Stocks—Some Investments Mine Your Pocketbook
The price of gold bullion—which recently touched an all-time high—has sparked considerable interest in gold investing, not to mention aggressive marketing and advertising of gold investments, including gold stocks. And even a cursory Internet search will pull up numerous websites, blog posts, investment newsletters and social media posts (including YouTube videos and Tweets) devoted to the topic of investing in gold.
But some of the stocks and opportunities being promoted have precious little value, and others are outright frauds. For example, the Commodity Futures Trading Commission (CFTC) took three separate actions against precious metals firms engaged in various schemes involving investments in gold, silver and other precious metals. In one action, the CFTC charged a precious metals firm in Florida with running a boiler room fraud that bilked investors out of more than $23 million.
As with other commodities, there are prudent and not-so-prudent ways to invest in gold. We are issuing this Alert to warn investors about investment scams that promote the latest "hot" gold stock and to provide information on how to invest wisely in gold.
Spotting "Gold" Stock Scams
Many gold-related investment scams involve the stocks of gold mining and/or exploration companies. The stock value is often based on gold reserves that are difficult to estimate, much less verify. While stock promoters regularly cite the potential value of a gold reserve, some statements can be deliberately misleading. For example, in 2010, the Securities and Exchange Commission (SEC) took legal action against a mining company based in Florida for false press releases and other misleading statements associated, in part, with a mining project in Ecuador. The releases claimed the gold reserves were worth more than $1 billion. The SEC noted that the exact value of those reserves could not be known “without further detailed exploration.”
Warning signs related to gold stocks include:
Fool’s Gold for Lunch
Be wary of “free lunch” programs that purport to provide educational information about gold investing. In June 2010, the SEC charged six individuals with running a Ponzi scheme that bilked more than 3,000 investors out of $300 million. The fraudsters, none of whom were registered to sell securities, claimed to represent an independent financial education firm that had discovered a way to earn up to 36 percent annual returns by investing in mining investments that were “fully collateralized by gold.” Rather than invest the money, the firm’s salesmen used the assets on lavish home renovations, mortgage payments for members of their extended family and the purchase of a luxury fishing resort in South America.
In addition, be mindful of warning signs common to many stock scams:
To avoid potential gold stock scams:
Alternatives to Gold Stocks
While you may be tempted to invest in a single stock, it is very risky to put all your “golden eggs” in one basket. Investing through a mutual fund or exchange traded fund (ETF) that focuses on gold companies or gold itself can help spread out and potentially lower your risk. Take the time to research fees and other expenses. Review the underlying securities that make up a given fund. You can do so by going to the issuer’s website, reviewing the latest quarterly report showing the fund’s major holdings or, in the case of an ETF, the exchange on which the ETF trades. Research the fund's manager or management team and read the prospectus carefully, and consider enlisting the help of an investment professional before you invest.
If you are considering a mutual fund that focuses on gold, be aware that most gold mutual funds primarily hold mining stocks, many of which are international, but some hold physical gold, as well. Mutual funds do not allow investors to take possession of physical gold.
If you are considering investing in an ETF that focuses on gold, understand its structure, including whether it uses futures strategies—and whether or not it holds the physical gold, invests in gold futures contracts or tracks a gold-related index. Be aware that ETFs that are backed by physical gold are not the same thing as a direct investment in gold. While some ETFs that are backed by physical gold allow individual investors to redeem shares for bullion, the ones that do may only allow physical redemptions under certain limited circumstances. So while they may be effective at offering exposure to gold prices, most are not an efficient way to obtain an ownership interest in physical gold. Therefore, if you are investing in a physical gold ETF, make sure you understand your redemption rights. Depending on its legal structure, a gold commodity ETF can be subject to varying tax treatments. Be sure to check with your tax advisor about the consequences of investing in a gold commodity ETF.
If you are thinking about investing directly in bullion or gold coins, similarly research your options. For a basic how-to overview, questions to ask and additional resources, read the Federal Trade Commission’s Investing in Bullion and Bullion Coins. Investors should be aware that while some gold promoters and dealers deliver what they promise, others don’t. Also, verify that a ready market exists to liquidate personal holdings of bullion and coins at current market prices and the related transaction costs.
Finally, be advised that while legitimate gold and ETF investments may be an acceptable diversification strategy, these investments can be quite volatile. A heavy concentration of gold investments can leave you overly exposed and at risk of losing a substantial percentage of your money.
Touts and outright scams come in many forms and involve many types of investments. Right now, you would do well to avoid unsolicited promotions of low-cost "gold" stocks. They are likely to mine a hole in your pocketbook.
To receive the latest Investor Alerts and other important investor information sign up for Investor News.