Time to warn clients about gold scams

Advisers, beware: The dramatic run-up in the price of gold, coupled with increased fear of more economic and market downturns, makes clients especially susceptible to gold-related investment scams.

By keeping a lookout for scammers and sounding the alarm when they see one, savvy advisers can help clients avert a financial catastrophe. In the process, they will also earn the trust, respect and loyalty of those clients.

Gold, which hit a record of $1,900.40 an ounce Aug. 22, rose 12.6% in August and closed the month at $1,827 an ounce. During the first eight months of the year, the price of the precious metal soared 28.1%, mainly on the back of growing uncertainty surrounding global sovereign debt and the corresponding devaluation of currencies.

Whether an economic doomsday is imminent, or if the yellow metal is just the latest asset to experience a speculative bubble, one thing is clear: As the prices of gold and precious metals rise, so too does the number of fakers, scam artists and swindlers trying to lure the unsuspecting into a variety of gold and precious metal “investments.”

Last month, for example, the founder of Fort Lauderdale, Fla.-based Gold Bullion Exchange pleaded guilty to fraud in a scheme that cheated more than 1,400 investors out of nearly $30 million.

Investors were told if they put up a fraction of the cost, margin financing would cover the rest of the purchase price. Of course, no bullion ever was purchased.

The Commodity Futures Trading Commission, meanwhile, recently charged three companies with fraud, alleging that they offered retail investors an “opportunity” to purchase gold, silver, platinum and palladium on a leveraged basis.

It is appropriate that regulators are pushing the alarm buttons.

Schemes involving gold and other precious metals, for example, were featured prominently on the North American Securities Administrators Association’s annual top 10 list of investor traps, which was released two weeks ago.

Meanwhile, the Financial Industry Regulatory Authority Inc. has issued a stern warning to investors to think twice before investing in gold-related stocks and schemes. While the price of gold has been rising steadily for years, the Aug. 24 warning marked the first time Finra has issued such an exhortation.

As guardians of their clients’ hard-earned savings, advisers play a pivotal role in protecting clients from financial fraud. Advisers should strongly encourage, if not insist, that they evaluate or at least take a fast look at every investment opportunity clients are considering, especially if that investment involves gold, silver or another precious metal.

Advisers also must make their clients aware of the signs of a scam artist at work. For example, they should be skeptical of pitches that link a company’s stock performance to the price of gold — one doesn’t necessarily have anything to do with the other.

Clients also should be told to be wary of gold-related investment pitches that employ Armageddon-like threats of runaway inflation or economic collapse. If clients are truly concerned about such threats, advisers can develop real risk mitigation strategies.

Finally, even if a gold-related investment is legitimate, now is the time for advisers to make sure that their clients know that the price of gold won’t keep going up forever. Although a reasoned case certainly can be made about why it makes sense to remain bullish on the long-term prospect for gold, clients should be prepared for corrections, the size and scale of which could be significant.