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Futures and Commodities

Golden Rules for Investors: What to Know Before Buying Physical Precious Metals

precious metals

There are a lot of ways to gain exposure to metals such as silver, gold, palladium and platinum. There are commodities futures, mutual funds and exchange-traded funds (ETFs). But investing in the physical metal can carry a lot of allure for some investors looking to diversify their investment portfolios.

Investing in gold and other precious metals, and particularly in physical precious metals, comes with risk, however, including the risk of loss. While gold is often considered a "safe haven" investment, gold and other metals are not impervious to price declines. Know the risks associated with trading of this type of investment product.

Additionally, investors should be aware that direct investments in precious metals are not covered by the Securities Investor Protection Corporation (SIPC) as physical precious metals are not registered securities.

These five "golden rules" can help you avoid problems when it comes to investing in physical precious metals:

1. Say "no" to pushy salespeople. Investing in physical precious metals comes with the risk of encountering high-pressure sales tactics and even fraud. Remember: 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. There is no centralized, regulator-approved list of gold dealers, but, just like other businesses, you can find some gold dealers accredited by the Better Business Bureau. The U.S. Mint, meanwhile, maintains a searchable database of coin sellers. The National Futures Association’s (NFA) Background Affiliation Status Information Center (BASIC) will tell you whether a firm or individual is registered and whether they have been the subject of any disciplinary actions. And it's always a good idea to check an investment professional's background using FINRA’s BrokerCheck and to do a general Internet search.

3. Be on high alert when you hear "low risk." Don't fall for a pitch that investments in physical metals are “safe” or 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 for 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 says no, end the conversation and find another seller.

4. Look out for leverage risk. Precious metals investments often involve the risky and expensive use of leverage, which is 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 "on margin." In some cases, this margined portion may be up to 80 percent of the metal's purchase price. This is a loan that 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. Between account opening fees, commissions that can reach 15 percent or more of your investment (including any leveraged portion, storage fees, management fees and ongoing interest on the loan for the leveraged portion of the precious metals purchase, it can be challenging to make money on investments in physical precious metals. Before you invest, make sure you understand all the costs and what level of return you’d need to earn to break even.