5 Golden Rules for Avoiding Problems with Physical Precious Metals

The IRS isn’t the only government agency sending out refund checks this time of year. The Federal Trade Commission sent checks totaling more than $2.4 million to over 100 investors who had fallen victim to the Premier Precious Metals scheme. The fraud conned consumers into buying precious metals on credit without clearly disclosing significant costs and risks, including the likelihood that buyers would subsequently have to pay more money or lose their investments.

No reputable investment
professional should push
you into making an
immediate investment
decision, or tell you
to "act now."

That may sound like good news—and by fraud standards, where most victims don’t get any money back at all, it is. But those refund checks represent only 70 percent of the amount investors lost.

Precious metals can play a helpful role in building a diversified portfolio, but some investments are better than others. These five “golden rules” can help you avoid problems when it comes to investing in physical precious metals:

  1. Say "no" to pushy salespeople. No reputable investment professional should push you into making an immediate investment decision, or tell you to "act now." Even if no fraud is taking place, this type of pressuring is inappropriate. Be particularly wary of unsolicited telephone calls. Persuasion tactics—such as dangling the prospect of large profits (the "phantom riches" tactic) or implying that there are limited quantities of an investment available (playing the "scarcity" card)—are often used.
  2. Check out the salesperson's background before you invest. Although firms offering precious metals to retail customers do not have to be registered with a federal or private-sector securities regulator if the metal is delivered within 28 days, a number of the sales professionals involved in enforcement actions were previously registered with the National Futures Association (NFA). Use the NFA's Background Affiliation Status Information Center (BASIC) to check whether the firm or individual is registered with the CFTC or an NFA member, and whether the firm or individual was the subject of any disciplinary actions. It's also a good idea to check an investment professional's background using FINRA BrokerCheck and to do a general Internet search.
  3. Be on high alert when you hear "low risk." Don't purchase physical quantities of precious metals based on a promise that the investments are "safe" or have minimal risk of loss. In particular, don't fall for the pitch that investments in physical assets are not risky. Storage charges, price fluctuations and the use of investor loans to finance the purchase of metal bars, bullion or coins are just a few of the risks associated with an investment in physical precious metals. Ask to receive a risk disclosure statement from the salesperson before you send any money. And request the salesperson's name, address and telephone number, as well as that of the firm. If the salesperson balks at the request, end the conversation.
  4. Look out for leverage risk. Precious metals investments often involve the risky and expensive use of leverage, or borrowed money. You may pay a portion of the cost to invest in the precious metal in cash, but then pay for the rest of the investment (in some cases up to 80 percent of the metal's purchase price) "on margin." This margined portion is in fact a loan which carries interest and is subject to the risk of a margin call if the value of the investment declines. In the event of a margin call, you may be required to invest additional money to prevent your investment from being liquidated without your consent or prior notice.
  5. Get a full accounting of fees. There is often an account opening fee with physical precious metals investments, which can be hundreds of dollars. Then there are commissions, which can be 15 percent or more of your investment, including any leveraged portion. Add in storage fees, management fees and ongoing interest on the loan for the leveraged portion of the precious metals purchase, and you may find that you would need to earn an unusually high return on your investment just to break even. It can be extremely difficult to make money on direct investments in physical precious metals.

Investors also should be aware that direct investments in precious metals are not covered by the Securities Investor Protection Corporation, or SIPC. SIPC provides limited coverage to investors on their brokerage accounts if their brokerage firm becomes insolvent. But with precious metals, SIPC protections do not apply because the investments are not registered securities.

While precious metals investing can open up growth and diversification opportunities, be aware of the additional risks that come with it, and be prepared to do your homework.