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Precious Metal Financing Agreement Scams
Beware of promises of easy profits from buying precious metals and other commodities
Consumers should be alert to companies that sell investments in precious metals and other commodities based on sales pitches claiming that customers 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.
The United States Commodity Futures Trading Commission (CFTC) is the federal agency that regulates the trading of commodity futures and options contracts in the United States and takes action against firms suspected of illegally or fraudulently selling commodity futures and options. 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 "cold calls," to promote the purchase of precious metals such as gold, silver and platinum. In the CFTC's experience, the advertisements, infomercials and telephone solicitations often promise quick riches - such as the ability to double or triple the customer's initial investment in just two or three months - all 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 downpayment. Companies often discourage customers from taking delivery of the metal. These companies 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.
It has been found that companies making these 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 the customer to break even (let alone profit), since hefty finance and storage fees and commissions are deducted from the customer's account before any profits accrue;
- Falsely claim to be purchasing and storing the metal, when they do not actually do so. Indeed, 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 a customer's account equity to the point where the customer has to deposit additional funds with the company or have his 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.
Warning signs that your commodity investment opportunity is actually a scam
If you are solicited by a company to purchase commodities, watch for the warning signs listed below:
- Avoid any company that predicts or guarantees large profits with little or no financial risk.
- Be wary of high-pressure tactics to convince you to send or transfer cash immediately to the firm, via overnight delivery companies, the internet, by mail, or otherwise.
- Be skeptical about unsolicited phone calls about investments from offshore salespersons or companies with which you are unfamiliar.
- Prior to purchasing, contact the CFTC (www.cftc.gov) or other authorities, including your state's securities commissioner (www.nasaa.org), Attorney General's consumer protection bureau(www.naag.org/index2.html), the Better Business Bureau (www.bbb.com) and the National Futures Association (www.nfa.futures.org).
- Be sure you get all information about the company and verify that data, if possible. If you can, check the company's materials with someone whose financial advice you trust.
- Learn all possible information about fees and commissions charged, and the basis for each of these charges.
- If in doubt, don't invest. If you can't get solid information about the company, the salesperson, and the investment, you may not want to risk your money
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, even if they do not reveal that fact to you while soliciting your investment. United States 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.
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.
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