Peter Schiff
Euro Pacific Precious Metals
Posted Nov 28, 2011

Below is a summary of my 15-page special report, "Classic Gold Scams and How to Avoid Getting Ripped Off." If you'd like to learn more and receive a free download of the full report, go to www.goldscams.com.

I've always advocated that investors hold at least 5-10% of their portfolios in physical precious metals. With major Western nations now defaulting on their debts, more and more investors have decided it's time to take my advice and own an asset that doesn't depend on the solvency of an ETF, bank, or government.

Unfortunately, with all these news buyers in the gold market, there is ample opportunity for dishonest firms with big advertising budgets and celebrity endorsements to make a quick buck.

If you are thinking of buying gold or silver for investment, diversification, or asset protection reasons, this quick guide will help you avoid common scams and pitfalls.

The Numismatic Bait and Switch

The most important concept for new gold & silver investors to understand is the difference between bullion coins and numismatic coins.

• Bullion coins are those that derive their value almost entirely from their metal content.

If a bullion gold coin is priced at $1800/oz, it's because it contains close to $1800/oz worth of gold.

• Numismatic coins derive some or all of their value from being "rare" or "collectable."

If a gold numismatic gold coin is priced at $3600/oz, it probably still contains only $1800 worth of gold, and the rest is a premium for the coin's aesthetic qualities.

If you want to invest in precious metals, you want bullion coins or bars. If you want to build a coin collection for sentimental or historical purposes, you want numismatic coins. A buyer should always know which is which, and purchase accordingly.

The problem is that most coin dealers want to confuse you about this distinction.

Very few gold dealers make their living selling bullion coins. Instead, they bait you with bullion to get you on the phone, and then convince you in various ways to switch your purchase to numismatics - because their profit margin on these "rare" or "collectible" coins is vastly higher.

Just like buying an Armani suit is not an investment in wool, numismatics are not an investment in gold. Look what central banks and smart investors around the world purchase. Open their vaults and you will not find rare collectors' pieces; instead, you'll find bars of solid, bullion metal.

Unless you're a very serious coin collector with specific knowledge of the numismatic world, stick with bullion coins like the American Gold Eagle, Canadian Maple Leaf, or Krugerrand.

The Confiscation Con

One of the main techniques a metals broker will use to "switch" you to numismatics is to talk about President Roosevelt's "confiscation" of gold - and then claim that only their coins are exempt. This is baloney.

When Roosevelt issued his order, the US was on a gold standard, so confiscation was a necessary part of his plan to devalue the dollar. Now, the dollar is backed by nothing, so that reason no longer applies. If the government finds another reason to confiscate your assets, they will likely be coming after everything (land, stocks, cars, etc.), and at least gold is easy to conceal.

The reality is that no gold was forcibly confiscated in the 1930s. There was a single case of a New York attorney prosecuted for trying to withdraw gold from a safe-deposit box, but it was thrown out on a technicality. Yes, the law made it impossible to conduct official business in terms of gold for some 70 years, but the average investor's personal stash was safe and sound.

However, to debunk this claim on its face, all you have to know is that almost all of the "numismatic" coins being sold by these scams dealers wouldn't have qualified as "rare and unusual" under the terms of Roosevelt's order. Most are simply old coins that were minted en masse by historic empires, like Austria-Hungary, the British Empire, and the French Empire. They are genuinely old, but about as rare as a ballpoint pen.

Proof Sets and Commemorative Sets

Be wary of anything using the term "collectible," "proof," or "commemorative," as they often indicate a severe rip-off.

• Proof Sets - Many of these sets consist of legal tender coinage, which contain no precious metals at all! After attempting to invest in gold and silver, you might be left with a nicely packaged set of US coins worth about 91¢.

• Commemorative Sets - You've probably seen commercials for commemorative coins "plated with gold or silver recovered from the vaults beneath the Twin Towers after 9/11." This is all part of the strategy to distract you from the fact that the coins are essentially worthless.

Once you get into buying proof sets or anything "commemorative," you have moved far away from any investment objective. These products may be appropriate for gimmicky Christmas gifts, but not for a serious portfolio.

The Leverage Trap

In a leveraged account, the dealer lends you money to buy gold. This can be very hazardous.

Gold can be volatile in the short-term, and if it drops in price, you'll likely be asked to send in more cash for a margin call. If you don't, the dealer will sell your gold at wholesale prices to cover the debt.

Further, you'll have to pay commission on the entirety of the purchase, eating into the amount of metal you receive. And let's not forget the interest and various fees which you'll pay, even if the price of the metal falls.

A quick Googling of the subject will show many people who have lost their entire investment by getting involved in these schemes.

The simple rule is: you shouldn't purchase financial services from a metals company.

Investment Grading and "MS-70"

Many coin dealers are selling bullion coins with an "MS-70" (mint state, flawless) rating at multiples of the price of an ungraded coin. Our research uncovered one company selling 2011 American Silver Eagles with an MS-70 grade for $129. My company, Euro Pacific Precious Metals, sold the exact same coin for $35!

Grading is only meant for collectors buying genuine old and rare coins. When it comes to bullion, all you need to care about is the weight of pure precious metal. After all, do you care if the change in your pocket has a bright, shiny finish? No! Because it is meant to circulate as money. Gold and silver bullion coins are money, not collectors' items.

Don't Be Fooled

If you're trying to invest in precious metals, then stick to bullion coins or bars. Don't be distracted by numismatics, rare coins, collector's items, or fancy packaging or grading schemes.

I founded my bullion dealer, Euro Pacific Precious Metals, because as a career-long stockbroker and CEO of a mid-sized brokerage firm, I was tired of hearing horror stories from my clients who I had advised to buy physical precious metals. Even though I have long warned of the dangers of the industry, it is hard for retail investors not to be led astray by high-pressure salesmen.

Reading this guide is a step in the right direction. However, I encourage you to read my in-depth report on common scams and rip-offs, available as a free download at www.goldscams.com. Find out the 4 questions you can ask to tell whether you're talking to a scam dealer. Track the performance of rare vs. bullion coins over the past 10 years. Learn how quickly $5,000 can disappear when invested in a leveraged account. There's no reason you should learn these lessons the hard way.

My hope is that by educating the gold-buying public, gold will come to be seen for what it is: a true safe-haven in a stormy economy.

Good luck, and good gold!

###

Peter Schiff
C.E.O. of Euro Pacific Precious Metals
email: info@europacmetals.com
website: www.europacmetals.com

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.

For the latest gold market news and analysis, sign up for Peter Schiff's Gold Report, a monthly newsletter featuring original contributions from Peter Schiff, Casey Research, and the Aden Sisters. Click here to learn more.