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Fraud Advisory from the CFTC: Precious Metals Fraud
Beware of promises of easy profits from buying precious metals and other commodities.
Be alert to companies that sell investments in precious metals and other commodities based on sales pitches claiming that you can make a lot of money, with little risk, by purchasing metal through a financing agreement.
Sometimes these companies offer opportunities to speculate on the price movement of precious metals, or other commodities such as heating oil, without actually taking delivery of the commodity.
Over the past several years, the CFTC has taken enforcement action against wrongdoers who lured customers to purchase purported interests in precious metals without taking delivery, through various misrepresentations including claims that they would earn large profits with little risk.
Certain companies advertise on radio, television, or Internet websites, or make telephone calls, to promote the purchase of precious metals such as gold, silver, and platinum. In our experience, these advertisements, infomercials, and telephone solicitations often promise quick riches, such as the ability to double or triple your initial investment in just two or three months, with low risk.
Companies making such statements typically ask that customers pay only a small percentage of the total purchase price, and also claim that they (or another company) will purchase and store the metal.
These companies also pretend to arrange financing for the customer's metal purchase so the customer can obtain a larger profit by controlling a larger amount of metal with their relatively small down payment.
Companies often discourage customers from taking delivery of the metal and often charge a commission for the purchase transaction, a loan origination fee, an interest charge on the remaining balance (which accrues over time), and fees relating to storage and shipping of the metal they pretend to purchase for the customer. Sometimes, not all of these fees are disclosed up front.
What's Wrong With These Sales Pitches?
The CFTC's experience is that companies making such sales pitches often
- lie about or overstate their ability to predict prices or the direction of the metals markets;
- minimize the degree of investment risk involved in metals investments;
- fraudulently fail to disclose how much the price of metal must go up for you to break even (much less make a profit), since large finance and storage fees and commissions are deducted from customer accounts before any profits accrue;
- falsely claim to be purchasing and storing the metal when they do not; indeed such companies often discourage customers from taking delivery of the metal;
- charge phony "storage" fees for metal, when no metal is actually purchased or stored;
- charge phony "interest" fees that diminish your account equity to the point where you have to deposit additional funds with the company or have your account closed out at a total loss. The interest fees are phony because no metal has been purchased as promised, and the financing arrangement therefore is fictitious;
- fail to point out that, because you are buying on "margin" or with leverage, you will have to send the company additional funds (or sell a portion of your "metal position") if the price of the precious metals moves unfavorably.
Use Extra Care When Dealing With Foreign Companies
Sometimes companies that solicit customer investments in precious metals (or their purported storage facilities) are located outside the United States and they may not reveal that fact to you while soliciting your investment.
Ask where all companies that would handle your funds are located, where any telephone call you receive originates, where your funds will be deposited and kept, and where the metal will be stored. If possible, telephone the company.
U.S. government agencies generally have little or no regulatory authority over entities operating outside the United States. If you transfer funds to foreign firms, or place funds with United States firms that are later transferred to offshore companies, it may be difficult or impossible for you to recover your money.
Storing metal offshore, particularly in countries with secrecy laws, might make it difficult for you to verify your investment.