Precious Metals Just as Risky as Other Investments
Gold, silver and other precious metals are often considered “safe” investments relative to stocks and securities. But there is no such thing as a no-risk investment. Precious metals are subject to price fluctuations like any other investment. More importantly, not all precious metal investments are the same. Often, people purchase gold and silver through brokers of dubious backgrounds and ethics. It is important to know who you’re buying from before investing.
Are Precious Metal Brokers Regulated?
According to the Financial Industry Regulatory Authority, a broker selling precious metals to retail customers does not need to be registered or licensed by the federal government, provided any purchased metals are delivered within 28 days of sale. If a broker sells futures contracts—that is, a promise to deliver metals at some point after 28 days, the transaction must be completed on a licensed and regulated contract market.
The Dangers of Selling “Off-Exchange”
The U.S. Commodity Futures Trading Commission (CFTC) regulates futures markets for precious metals. The CFTC has brought a number of recent enforcement actions against businesses that sell “off-exchange” futures contracts for precious metals. In most of these cases, the brokers use dubious financing mechanisms to fleece investors.
For example, on Dec. 5, 2014, the CFTC obtained a default judgment in federal court against an unregistered Miami-based broker. Jordan Cain was the sole owner and operator of Gold Distributors, Inc. (GDI), which purported to sell gold and silver to retail customers. In fact, GDI never sold any precious metals direct to consumers. Instead, GDI served as a middleman between investors and another company, AmeriFirst Management, LLC, which financed purchases of metals on margin. To put it simply, GDI’s customers only put about 25% of the money necessary to purchase metals, with AmeriFirst providing the remaining 75%. Customers were then charged fees on these “loans” as well as commissions to GDI on the total value of the metals. When all these fees and commissioners were added up, according to court records, “customers never even broke even on their investments, let alone earned a profit.”
Proceed With Caution
In its own Investor Alert, FINRA noted the risks of using leverage (borrowed funds) to purchase precious metals. As the above example demonstrated, any margin purchase may carry interest on the borrowed funds, which in turn may lead to a “margin call” forcing you to pay more upfront just to protect your principal investment.
Before entering into any precious metal investment, FINRA advises customers to obtain a full accounting of any fees—including any interest on any borrowed funds—so that you can determine if it is even possible to earn a profit on the purchased metals. FINRA further recommends customers resist pushy sales tactics—i.e., email solicitations encouraging you to invest immediately—and researching the background and history of any broker attempting to win your business. You can do your own background search on your commodities broker on the National Futures Association (NFA) website. The NFA website allows you to search by NFA Id Number, Firm Name, Individual Name or Pool Name.
It is important to do your due diligence before you invest, because after you’ve lost money, it may be impossible to get it back. Even regulatory actions by the CFTC and other agencies offer no guarantee of investor restitution. That is why, if you have been the victim of a precious metals or commodities scam or other securities fraud, you should contact Florida attorney Gregory Tendrich, P.A., to get advice on how best to proceed.