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Scams In the Gold Market

When you go up against a scammer, the scammer is going to win.

Think about it: the scammer only has one job. He wants to rip you off and will dedicate all of his energy into accomplishing that.

A legit gold dealer, on the other hand, has many jobs in running a business and all my effort is diversified in these tasks. To paraphrase something Condoleezza Rice said about terrorists: “They only have to be right once. We have to be right all the time.”

There are three factors that make victims fall susceptible to scams. The most obvious one is ignorance. A potential customer who has no idea what he’s doing or even how to go about making a proper purchase will easily be misled or talked into trusting the wrong person. The second factor is being in a situation that requires upfront payment. This is why there are so many investment scams. When a victim is willing to put up a payment upfront in exchange for something that he may or may not get, the scammer has already won.

But the biggest and frequently most overlooked factor of all has always been greed. This may sound like a harsh thing to say, but it’s true. When a friend starts telling you how they fell for some trick and were conned out of their money, examine their motives for entering the deal to begin with. Did they think they were getting something for nothing? Did it seem too good to be true? Often they fell for it because they got greedy, and greed impairs judgment.

Sadly, all three of these factors are inherent parts of the gold and silver market. The customer must make an investment, may not be familiar with this market, and can easily be manipulated by greed.  Now, you already know about doing research and being careful, but how will you know what not to do? Here are some of the most common scams of recent years: Cash for Gold - Due to the financial crisis, you may have noticed a saturation of  "we buy gold" signs appearing in store windows. Many small businesses, be they jewelers or pawn shops, are now offering to buy gold in exchange for cash. Even if they always did this, they are marketing it much more fiercely now. Paying in cash is always suspicious and suggests that the company has something to hide. If the amount they pay turns out to be incorrect, the customer has no way to prove the details of the sale. Furthermore, their ownership of the gold is often not verified nor may they necessarily request this from the customer, which opens up the possibility that they are receiving and selling stolen property. As it turns out, some of these companies are already under investigation for security fraud claims and laundering money.

High-Yield Investment Programs - One of the most prominent scams of recent years. These are pyramid schemes that are dressed up with no real value underneath but they use gold in their prospectus to sound more legitimate, and it adds a little novelty.

Advance Fee Fraud - Basically a version of the Nigerian Letter Scam. The scammer claims to be a broker who is selling ten thousand metric tons of gold, which happens to be more gold than is owned by the US Federal Reserve. His goal is to attempt to extract a small “validation” sum out of the innocent buyer from their hope of getting in on the big deal.

Mine Shares - The scammers is selling shares of a mining company, which sounds like the next best thing to purchasing the gold itself. Again, this scam plays off the victim’s ignorance, since the average person would probably not know the names of reputable mining companies and can be talked into buying shares of any name given. These companies may turn out to be fraudulent, or real companies that have neither gold reserves nor potential for finding any.

The best way to combat a scammer is to show you are knowledgeable and ask many questions, as well as to never rush into anything. Whenever someone starts showing more interest than would seem natural for a dealer who has many customers, or when they start pressuring you to spend immediately, this is a sign for you to do business with someone else. Yet even with all these things in mind, the person you trust may still find a way to trick you.

The Snake Oil Salesmen has been a prevalent part of our society for centuries, and as long gold as been a commodity, consumers have been duped. The best way to defraud someone is to offer him hopes and dreams and play into their greed. And gold represents the ultimate dream to many buyers. If you’re going to buy or sell gold, you want to do it right, and make sure you do business with others who are as serious about it as you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.