Precious metals investors need to use caution to avoid falling victim to the predatory tactics of counterfeiters, writes Paul Dykewicz, editor of Stock Investor.
The best way to start is to reach out to reputable coin dealers and comparison shop when seeking to buy or sell precious metals. The following tips provided by seasoned coin dealers should give you some guidance about the best precious metals values currently available and how to steer clear of deceitful deal makers.
Growing problem of counterfeit coins and ingots
Investors should beware of the “small but growing problem” of counterfeit silver coins and ingots, said Patrick Heller, communications officer at Liberty Coin Service in Lansing, Michigan.
“The risk of counterfeits is another reason to consider acquiring U.S. 90 percent silver coins as the best form of silver,” Heller said. “Counterfeiters could try to make fakes of these, but it would be far more profitable to them to make fakes of bars and modern issues such as U.S. Silver Eagle Dollars. As a consequence, there are almost no fakes of bulk U.S. 90 percent silver coins.”
Heller warned that gold ingots larger than 1 troy ounce in size are especially susceptible to counterfeiting.
“Tungsten has about the same specific gravity as gold, so it is possible to plate a tungsten counterfeit with gold to make it the proper weight and dimensions,” Heller explained. “Or genuine coins and bars have had gold drilled out of them on the side, tungsten rods inserted and a gold cap used to disguise the alteration. This problem seems to have been most often seen on gold ingots larger than the 1 troy ounce size. Because of this, I do not recommend purchasing gold bars larger than 1 ounce because of the risk that the owner would need to have it melted and assayed in order to sell it.”
To safeguard against such counterfeiting, Heller recommended that investors only conduct transactions with long-experienced precious metals dealers who trade in volume.
“In a high percentage of instances, the products they sell have been obtained from the wholesale market that came directly from the mints and private manufacturers,” Heller said. “The staff at these long-term dealers have the most experience at detecting counterfeits. They are also the companies most likely to permanently guarantee the authenticity of the products they sell, as opposed to private sellers in online auctions.”
Free storage can backfire if the provider goes out of business
Over the years, there have been a handful of precious metals dealers who have offered “free storage” to buyers of physical gold and silver, but later went out of business and “stiffed the customers,” Heller warned.
“My hard and strong recommendation is to never have any precious metals purchases left in storage with the company from whom they were purchased,” Heller said. “If a dealer proposes such an option, my recommendation would be to not even do business with that company. This is for the protection of the customers.
“Over the years, we have had local customers in our store tell us their woeful stories of purchasing precious metals from an out-of-area dealer at a slightly lower price than what we charged where the seller offered free storage — and went bankrupt without delivering the merchandise to the customers. As a basic customer protection, we recommend that buyers always take delivery, even if it is to ship it to a storage vault operated by a different company than the seller.”
Could the U.S. government seize precious metals holdings from citizens?
Investors also should avoid purchasing physical precious metals in an individual retirement account (IRA), Heller cautioned. He expressed concern that the U.S. government eventually will seize private retirement account assets, as has already happened in several other countries, as a way to try to cover unfunded liabilities.
“Unfortunately, there are some companies in the industry that focus on selling such accounts because that is often where customers have funds available to acquire gold and silver,” said Heller, who previously worked as a certified public accountant. “I have written of the many reasons why precious metals in an IRA are a bad idea.
Number one is that IRAs are a tax-deferral vehicle. However, owning physical precious metals are themselves a tax-deferral vehicle. IRAs are better suited for assets that throw off periodic income such as dividends and interest.
“Also, using an IRA is one of the most expensive and least private ways to own gold and silver. There have even been companies that tout ‘store-at-home’ precious metals IRA arrangements. The IRS has issued a statement that says it is almost impossible for such an arrangement to comply with regulations, which could lead to major tax nightmares for anyone doing this.”
The U.S. government made it illegal for U.S. citizens to own gold in 1933, but even though President Franklin Delano Roosevelt did not “outlaw” collector coins, the majority of the public did not understand that distinction and turned in their coins anyway, said Van Simmons, president of David Hall Rare Coins in Newport Beach, California.
However, President Roosevelt’s exception for allowing collectors of gold coins to keep them makes it “virtually impossible” for the federal government ever to outlaw $20 gold coins in the future, Simmons said.
“The U.S. $20 has been the most widely traded gold bullion coin in the world for the last 100 years,” Simmons said.
“Virtually all the coins I am able to locate today come out of Europe or South America,” Simmons said.
Reputable precious metals dealers operate transparently with customers
Rich Checkan, president and chief operating officer of Asset Strategies International, a full-service, tangible asset dealer in Rockville, Maryland, that offers precious metals, rare coins and foreign currencies, said reputable dealers always will be “happy to be transparent” with their pricing.
“They understand nobody begrudges a reasonable fee for quality goods and services provided,” Checkan said. “They will be happy to tell you the spot price of the precious metal at the time of purchase, the price you pay for the coin or bar, the premium charged and the costs to you for shipping, handling and insurance. If they are reasonable, they have nothing to hide. If they hide things from you when you ask, they are no doubt hiding things for a reason.”
Before purchasing precious metals, ask a dealer about the cost of selling the merchandise back, Checkan said. Investors should buy with an exit strategy and know the costs involved.
For investors wary about buying and storing physical p19ecious metals, an alternative is the VanEck Vectors Gold Miners ETF (GDX), which the Fast Money Alert trading service recommended on April 2. This gold and metals mining exchange-traded fund seeks to replicate the price and yield performance of the NYSE Arca Gold Miners Index and has an expense ratio of .53 percent, while offering an .80 percent yield.
Dr. Mark Skousen’s Forecasts & Strategies investment newsletter recommends each of the three coin dealers quoted in this column. Investors seeking to invest in precious metals should use caution to steer clear of counterfeiters who masquerade as coin dealers.
