How to Spot a Gold Scam

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"Even buying coins or bullion opens up the possibility of massive spreads against the spot price. . ."

Bernie Madoff's hedge fund operation turned out to be a $65 billion fraud, and while the current boom in precious metals might not produce a scam on that scale investors should take care. The most important thing in any investment is to take a good hard look at who you are trusting with your money.

If you are in the hands of third parties, like a bank with a vault, be careful. Is this an institution with a serious reputation to protect in a stable jurisdiction, or will the vault spring open the moment you leave?

Even buying coins or bullion opens up the possibility of massive spreads against the spot price, which may not be available when the gold is sold. And can you be sure that what you are buying is gold? Again a reputed, preferably government mint is advisable, but then forgeries are not unknown.

Buying gold that is held on your behalf in vaults against some form of certification is also to be treated with caution. Who is this third party? Do they have a government guarantee, or better still are they a government institution in a stable jurisdiction?

You then have to consider whether to take allocated or unallocated gold, that is to say numbered bars owned by you or the promise of gold actually held by a third party. This depends on the amount of trust you can place on the third party, though unallocated gold usually carries no storage costs and is, therefore, the most efficient investment vehicle.

Exchange traded funds have become popular as vehicles for investment in gold, and the most popular ETF now holds more gold than China, so the fund is liquid enough to handle any person's investment requirement. But the spread on ETFs is still not as efficient as unallocated gold in a government mint.

Given that most investors are looking just to benefit from the rising value of gold, these last two vehicles offer both efficiency and almost complete security against fraud.

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