The Gold Rush: Don't Get Burned

With the yellow metal near $1,000 per ounce, investors are clamoring for coins and bullion. But buying gold in its physical form can be tricky

By David Bogoslaw

If you had any doubt that the prime motivation for investors has shifted from greed to fear, look at the price of gold. The spot price for the yellow metal reached $992.43 an ounce on Feb. 20, its highest level since hitting $1,002.70 on Mar. 17, 2008, the day that Bear Stearns collapsed. The spot price has climbed more than 39% from a near-term low of $712.30 on Nov. 12, 2008.

Demand for physical gold has exploded as the deepening financial crisis and ongoing slide in stock prices has pushed nervous investors into safe-haven investments. But new investors need to be careful about who they buy from, since inexperienced people seeking to take advantage of opportunities in the market are opening coin dealerships without being aware of the financial risks or legal compliance issues involved.

How to Choose a Dealer

"These days, with everything going on with the [Bernard] Madoff scandal and now the [Allen] Stanford scandal, you have to know exactly who you're dealing with," says David Beahm, vice-president at Blanchard & Co., a leading retail dealer of gold coins and other precious-metals products based in New Orleans. The best way to ensure the quality of what you're buying is to do your due diligence when choosing a dealer, he says. The Better Business Bureau is a good place to start, at least to be able to see whether a certain dealer's clients are satisfied or not. And the Internet makes due diligence that much easier. For instance, you can check whether a dealer belongs to the Professional Numismatists Guild (PNG), a nationwide association based in Fallbrook, Calif., on the PNG Web site.

Be wary of incoming cold calls from dealers unless it's someone with whom you have a long-standing relationship, advises Diane Piret, industry affairs director at the Industry Council for Tangible Assets (ICTA), the national trade association for rare coin and precious-metals dealers. Investors are better off seeking out dealers on their own. It's a good idea to look for companies whose dealers are members of the PNG, which requires dealers to have five years of experience as numismatists, have a net financial worth of at least $250,000, and be elected to the guild by a majority of the present members. PNG members must abide by guild rules, which include an arbitration process to resolve any dispute over product quality between buyers and sellers.

It's treacherous to enter the bullion market with no understanding of how tight the margins are and how rapidly investors can lose their shirts, given the volatility in gold prices, says Piret. Although she has received five or six inquiries recently from people asking which laws they need to comply with in order to establish a dealership, she doubts many of them have subsequently opened a business. "A dealer who buys and sells over $50,000 with all [his] customers of bullion-related products…needs to be compliant with section 352 of the Patriot Act and have a compliance officer," she says. "Cash reporting laws and money laundering laws are very serious."