The Nebraska Department of Banking and Finance (NDBF) has received complaints related to investments in precious metals, particularly those connected to self-directed individual retirement accounts. 

Advertisements for precious metals may emphasize the potential for large returns while downplaying risks. Promotions may target seniors who are worried about a financial crisis or stock market volatility. Other advertisements might play on the fear of missing out (FOMO) when gold or silver prices hit new highs.

Buyer Beware

In an investor advisory, the North American Securities Administrators Association (NASAA) writes: “(A)n investment in precious metals is not foolproof, and an investor needs to know their investment objectives. Precious metals may not provide long-term investment returns. Precious metals are commodities, and like other commodities, their price can fluctuate dramatically. … (I)nvestors should consider several factors to determine if precious metals fit their investment objectives.”

Investors should not rely on advertisements, word-of-mouth referrals, or “cold calling” tactics. Be particularly wary of aggressive sales tactics that encourage liquidation of an existing portfolio in favor of an investment in precious metals. 

NDBF strongly encourages thorough, independent research before investing.

Bullion, Numismatic, and Semi-Numismatic Coins

A precious metals dealer may sell a variety of metals in different forms, including bullion – highly refined gold and silver in the form of coins or bars. These dealers usually sell bullion with a small mark-up, also known as a “spread.” While there is not a standard spread for the industry, typically precious metals dealer spreads will vary between 1% to 10%. 

A precious metals dealer may also be involved in the business of selling numismatic coins, typically to coin collectors. A numismatic coin is a collectible coin and may have a higher value than its melt value (the value of the amount of gold or silver its minted on) because of its age, rarity, or historical significance. A precious metals dealer will likely take a higher mark-up on the sale of these coins. There is also much less liquidity in the numismatic market because the market for these kinds of coins is much smaller than it is for bullion.

The sale of semi-numismatic coins has been the subject of recent enforcement actions by state securities regulators and the Commodity Futures Trading Commission (CFTC). Precious metals dealers pitch semi-numismatic coins as having the same rarity as actual numismatic coins – but these coins are often neither rare nor sought after. The weights and mints of these coins might be unusual or atypical, but the coins themselves are no more valuable than what they can be melted for. In some instances, the market is so limited that the investor can only sell the coin back to the broker or precious metals dealer from which it was purchased.

Self-Directed IRAs

Recently, the CFTC wrote: “Precious metals frauds are on the rise and scammers prey on fears related to the durability of the U.S. financial system. These frauds promise ‘safe’ investments, but the reality is the fraudsters sell the metals at inflated prices and charge high commissions. The fraudsters target senior citizens and pre-retirement investors, convincing them to turn over their savings or retirement accounts, through self-directed IRAs, to invest in precious metals.”

As with other individual retirement accounts, the owner of a self-directed IRA (SDIRA) invests in various assets, while a custodian holds the IRA on the owner’s behalf. While most IRA investments are limited to common securities like stocks or bonds, SDIRAs allow for investment in alternative assets, which could include items such as cryptocurrencies and precious metals – both of which are riskier investments than those permitted by most IRA custodians. 

NASAA has noted that investments held in a SDIRA “may lack the disclosure and liquidity of more traditional investments and have an increased risk of fraud.” 

The CFTC, meanwhile, reports that often the costs with precious metals SDIRAs “are so high that buyers never see a profit from their metals ‘investments.’ In one recent complaint, a gold dealer and IRA custodian charged nearly $150,000 in commissions and fees to a customer who rolled over a $300,000 retirement account into a gold IRA.” Other recent cases have spotlighted dealers who charged customers extra to store bullion in vaults that didn’t exist – or who didn’t purchase actual metals.

Remember, custodians of self-directed IRAs do not review or perform any due diligence regarding the quality or legitimacy of investments held in a self-directed IRA. Many investors are shocked to receive their first statement from a custodian showing that in the first month or quarter of ownership of precious metals, the value of their metals decreased by the spread taken by the seller – anywhere from 25% to 75%.

Anyone considering a self-directed IRA should obtain as much information as possible prior to investing, including: 

• Duties and responsibilities of the IRA custodian;

• Fees associated with the account; 

• Tax consequences of opening, investing in, or withdrawing from a SDIRA; and

• Details regarding the alternative assets in which funds will be invested. 

Rules to Protect Yourself

The Financial Industry Regulatory Authority (FINRA) has issued an alert that provides the following tips for individuals considering an investment in precious metals:

• Say “no” to pushy salespeople.

• Check out the salesperson’s background before you invest.

• Be on high alert when you hear “low risk.”

• Watch out for leverage risk (using borrowed capital to invest or trade).

• Get a full accounting of fees.

Adhering to these rules can help you avoid surprise costs or fees, and guard against fraud. 

A final note: There is no centralized, regulator-approved list of gold dealers. Like other businesses, you can find some gold dealers accredited by the Better Business Bureau. The National Futures Association’s Background Affiliation Status Information Center (BASIC) will tell you whether a firm or individual is registered, and if they have been the subject of any disciplinary actions. Also, it’s always a good idea to check an investment professional’s background using FINRA’s BrokerCheck and to do a general internet search.

If you suspect that you’re a victim of investment fraud, call the NDBF at (402) 471-2171 or file a complaint.