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How not to buy gold

Created:

27 May 2009

Written by:

Maike Currie

Gold's status as a safe haven in torrid times has seen an unprecedented rise in the popularity of the yellow metal for investment purposes with the World Gold Council very recently reporting an 248 per cent increase in the first quarter of this year in the identifiable investment demand for gold, compared to the same period last year.

The figure includes the likes of exchange traded funds (ETFs), gold bars and coins, which are all witnessing massive buy-ins. However, the rise of the yellow metal has its caveats. Adrian Ash, head of research at gold bullion exchange, BullionVault.com, says the rise in gold prices over the last five years is giving way to poor deals and in many cases, rip-offs.

“Take care,” he advises, “because physical gold is not a regulated investment market." So while lots of people think they should be buying gold, they fail to recognise that there are bad ways to buy the metal. Here are five of the worst ways of delving into the yellow metal:

1. Online auction sites: While this might seem like a bit of a no-brainer, eBay has seen a surge in gold-coin auctions as demand for physical metal has grown. The prices on online auction houses often out-strip true gold-market values – known as the "spot" gold price – by 25 per cent even for the plainest coins. Rarer gold coins are often bid up much higher as new investors lack knowledge about what they are buying.

2. Newly minted “collectible” coins: So-called “collectible” coins can cost significantly more than the actual value of the gold they contain. Mr Ash points out that The Royal Mint, for instance, charges mark-ups of 40 per cent-plus. "Its new 'Countdown to London 2012' series priced at £1,295, costs almost twice the value of each coin’s gold content. Yet modern commemorative coins rarely hold onto that extra premium, let alone extend it. The Royal Mint’s 2008 Olympic Handover coin, for example, can now be bought for 5 per cent below its issue price, despite the gold price in Sterling rising by one-third since the close of the Beijing Olympics last summer."

3. “Rare” gold coins: US authorities repeatedly warn investors against “hard-sell” dealers charging rip-off fees for what turn out to be anything but so-called “rare” gold coins. Spotting a truly rare coin and knowing how much above the gold-content’s value it should cost takes experience and expertise. Take the time to build your knowledge and understanding before venturing into this market.

4. Inflated pricing: Over-charging by reputable-looking companies is a trap to snare unwary first time gold buyers. Many are selling gold to UK investors at between 15 per cent and 40 per cent above the true “spot market” value aided by reports of a gold coin shortage. To avoid paying high mark-ups, simply check the current “spot” gold price online. For gold bullion coins, such as the South African Krugerrand, expect to pay any where between 7 per cent and 10 per cent above “spot” from a well-established dealer. To cut costs further, consider buying bullion bars instead – the bigger, the better – to take advantage of paying “wholesale” rather than “retail” prices per ounce.

5. Unallocated gold-storage accounts: When a bank sells you gold but holds it in safe-keeping, the account is almost always “unallocated”. This makes you a creditor, just like a cash depositor, but without any government-backed insurance. Unallocated gold thus puts you "on risk" for the bank's financial survival, because the bank owes you metal which you don't own. The giveaway here are the words "free storage", since there need not be any gold stored for you. Whereas "allocated" gold is physically held in safe-keeping, but belongs to you outright, and costs you a monthly or annual storage fee that includes insurance.