CFTC PRECIOUS METALS CONSUMER FRAUD ADVISORY

Beware of companies that sell investments in precious metals that make promises of easy profits to be made from rising prices in gold, silver, platinum, palladium, and other precious metals.

Be especially alert to companies that sell investments in precious metals claiming that you can make a lot of money, with little risk, by purchasing metal through a financing agreement with only a small payment up front.

The CFTC has seen an increase in the number of companies that offer customers the opportunity to buy or invest in precious metals. However, many of these companies do not actually purchase or store any metal for their customers.

This precious metals consumer fraud advisory describes how some precious metals companies may use fraudulent tactics to induce customers to invest, how these companies actually operate, and provides warning signs to help you identify a potential precious metals scam.

Precious metals companies typically advertise their “investment opportunities” on radio, television, or Internet websites. Typically precious metals companies solicit personal information such as your name, your phone number, and your home address. Then, a “broker” or “salesman” from the precious metals company calls you directly to promote the purchase of precious metals such as gold, silver, platinum, and palladium.

These advertisements, infomercials, and telephone solicitations often promote precious metals as a conservative and easy way to generate investment profits in the current economic downturn. Unscrupulous brokers often verbally promise quick riches, such as the ability to double or triple your initial investments within a few months with little or no risk.

The precious metals companies, often calling themselves “metals dealers” or “merchants,” typically offer consumers the opportunity to purchase precious metals and tell customers that they can make money based upon the price movement of precious metals. The investment is usually structured so that consumers pay only a small percentage of the total purchase price, between 15 percent and 25 percent. The precious metals companies claim to arrange a loan to the consumer for the rest of the precious metals purchase price and assert that the consumer can make large profits by controlling a larger amount of metal with a relatively small down payment. The precious metals companies also claim that they will store the metal for the consumer in a storage facility or “bank.” Sometimes these companies ask the consumer to set up a business or corporation in order to qualify to purchase or trade in precious metals.

The CFTC’s experience is that precious metals companies making such sales pitches often:

• Lie or overstate their ability to predict prices or the direction of the metals market;
• Lie about how long they have been in business;
• Do not purchase any precious metals for the customers at any time
• Do not actually arrange for loan financing with an independent financial institution, yet charge phony "interest" fees;
• Do not store any metal with an independent bank or storage facility, but charge phony "storage" fees;
• Use most of the customer's investment to pay themselves "commissions," leaving little equity in the customer's "metals position";
• Do not disclose all of the fees and commissions they charge;
• Fail to disclose how much the price of metal must go up for the customer to break even, since large "finance" and "storage" fees and commissions are deducted from customer accounts;
• Fail to disclose that, because the customer is not paying the full purchase price of the metals (but is buying on "margin" or with "leverage"), the customer will have to send the company additional funds (or sell a portion of the customer's "metal position") if precious metals prices move unfavorably; and
• Fail to disclose what will happen to the customer's investment if the company goes bankrupt or out of business.

In reality, consumers who purchase or invest with fraudulent precious metals companies often never see the promised profits and usually lose all or a significant portion of their investment.

In addition, consumers should note that under the Dodd-Frank Wall Street Reform and Consumer Protection Act, leveraged commodity transactions with retail consumers (transactions where consumers pay only a portion of the total price of the commodity) are generally prohibited unless traded on a recognized exchange.

So how can you identify a potential precious metals scam? Here are some warning signs:

Beware of precious metals companies that:

• Expressly state that precious metals transactions are not regulated by the Commodity Futures Trading Commission (CFTC) or the National Futures Association (NFA). Such statements are common in account agreements associated with precious metals scams;
• Sell investments in precious metals based on sales pitches claiming that the customer can make a lot of money, with little or no risk, by purchasing metal through a financing agreement;
• Do not identify where the physical metal is located, or claim to deliver physical metal to a foreign bank or foreign storage facility;
• Do not identify the financial institution or bank that will be loaning the customer money; and
• Require you to set up a corporation or business in order to qualify to purchase or trade metals.

Sometimes U.S. companies that solicit customer investments in precious metals claim that the metals will be delivered to a storage facility located outside of the United States.

If you place funds in U.S. companies that make such claims, it may be difficult or impossible for you to verify your investment or recover your money.

Therefore, ask where your funds will be deposited and kept, where the metal will be stored, and if possible, call the overseas storage facility.

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