7 Warning Signs You’re Making Bad Gold Investments

I’ve witnessed firsthand the allure of bad gold investments. It’s hypnotic…

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By Alice Walker
Investor Relations Manager at Bullion.Directory

But as with any investment, navigating the gold market requires a discerning eye and an informed mind. It’s luster can sometimes cast a blinding light, obscuring the warning signs of bad gold investments. Gold can be hypnotic, intoxicating and all-consuming. Trust me I know.

Today, I’m putting the brakes on (just a little) and looking at seven warning signs that you might be making bad gold investments.

1. Overpaying for Collectibles

In all my time of advising clients, I’ve encountered one incredibly common trap, time and time again — investors falling victim to the world of gold collectibles.

Don’t get me wrong, a gold coin minted during the California Gold Rush or a limited-edition bullion series can be fascinating. It speaks to the collector in us, it gets our FOMO monkey brain cells firing on all cylinders, with thoughts of rarity and exclusivity.

But herein lies the rub: gold collectibles always come with a hefty premium – an added cost that doesn’t necessarily translate into better returns.

Many so-called collectibles are neither rare nor special. Yes they may be exclusive to a single dealer, or only available in ‘limited’ numbers, but at the end of the day all they really are is bullion with slick marketing.

An old client of mine, let’s call him Mr. D, was once tempted by a collectible gold coin’s pop-culture appeal. He invested a significant chunk of his portfolio in it, only to find out later that its premium value had decreased significantly due to market saturation. The coins were not rare, they were not sought after and they were all over auction sites at prices not far over their gold-value. A hard lesson learned.

Remember, unless you’re a seasoned numismatist, it’s better to stick to gold bullion products when investing.

Yes gold collectibles can be enticing. A nugget of history or a piece of art in the form of gold coins or rounds can make even the most seasoned investors’ hearts race. But as I often tell my clients, investing is not about the race, it’s about the marathon.

You want to invest, buy bullion. You want to collect, buy baseball cards.

The premium that comes with these collectibles is always disproportionate to their actual gold content. In essence, you’re paying more for their numismatic or historical value, which may or may not be as the bullion dealer offering you the coin states. Do you know for sure it’s rare or worth that premium?

Let’s get back to Mr. D. – after the unfortunate episode with his ‘rare’ gold coins, he switched his focus to standard bullion bars and coins. Today, his portfolio reflects a much healthier return on investment, proving that you don’t always need to chase the shiny objects to make profitable investments.

2. Ignoring Tax-Advantaged Gold

When buying gold, buy it with every price advantage you can get. One of the golden rules I’ve learned over the years is to never ignore tax-advantaged investments, as these come with a built-in ‘discount’ thanks to the IRS.

Gold IRAs, for example, can provide you with tremendous tax advantages, allowing your investments to grow tax-deferred, or to be sold free of tax depending on whether they are in a traditional IRA or a Roth IRA.

I’ve seen too many investors overlook these benefits, only to find out later how much they’ve lost in potential savings, and because of this a gold IRA is one of the first things I suggest to new clients.

Consider Mrs. B, a wealthy investor who initially focused only on physical gold bullion bars and coins, which she stored in a deposit box at her bank.

After discovering gold IRAs and adding gold directly into her retirement account, it only took a few years for her to see the difference reflected in her tax bills. Today, she proudly calls her Gold IRA her “golden goose.”

Check out our top choices for gold IRAs here – winners of Bullion Dealer of the Year 2023

The tax advantage of a traditional gold IRA can add up to a significant amount over time. And with a Roth, there can be no tax due on disposal of your gold, provided you meet certain IRS criteria.

Mrs. B’s story is a testament to the power of tax-advantaged investments. After the wake-up call from her massive tax bills, she made the wise decision to open a Gold IRA. With her contributions growing tax-deferred, she’s now enjoying a lower annual tax bill as she buys new gold and much more efficient growth on her portfolio.

This goes to show that it’s never too late to take the right steps.
 

3. Falling for High Premium Gold

Another warning sign of bad gold investment is falling for high premium gold. Much like collectible coins, other bullion products can come with a far higher premium than would be prudent.

As a matter of fact, you should be cautious of ANY gold products with premiums that significantly exceed their melt value.

So apart from collectibles, what makes high premium gold? Well first up, ALL gold comes with a premium – this is the cost of mining, processing, refining, minting, shipping and stocking the gold products, plus a small profit for the gold dealer.

Bullion can see higher than standard premiums during market rushes to buy. During the silver squeeze last year silver coins and bars went from having a 5-6% premium to sometimes 40-50% premium for the exact same coins due to supply issues. Although the supply issues are now over, premiums still haven’t quite returned to their norm.

Buying smaller sized gold bars, or fractional gold coins also comes with a far higher premium, because no matter the size of the piece, it will still have cost roughly the same to refine, mint, ship and stock as a larger piece.

This translates into the premium on tiny 1g or 2.5g gold bars being as high as 90%, or some 1/10oz coins being 80-100% more than their melt value.

They are guaranteed to eat into your potential profits due to their inflated upfront costs.

The golden rule here is to focus on the purity and weight of gold. Heavier bars and coins have lower premiums, so if you want to get best value, buy at a size with a premium you are comfortable with in relation to it’s overall price.

After all, when you sell your gold, you’ll be paid based on its intrinsic value, not the premium you initially paid.

4. Not Doing Due Diligence

You wouldn’t buy a car without checking under the hood, would you? The same applies to gold investments.

Skipping at least basic due diligence is a surefire path to bad gold investments. Take the time to understand gold grades such as bullion, collectible and numismatic, the market dynamics, and current trends. Research the dealer’s reputation and transaction history. The time you invest in research now will pay dividends down the road.

Gold investing, like any other form of investing, requires thorough due diligence. Not doing so is akin to driving blindfolded — yes you might move forward, but you’ll likely crash.

Falling for fancy marketing materials or persuasive sales tactics without due diligence can lead to serious losses. Read reviews and ratings on established review sites like Bullion.Directory. We list over 1600 gold dealers in the US and around the world complete with consumer reviews.

One of my clients, Mr. R, once impulsively purchased a large quantity of gold from a dealer without adequate research. To his dismay, the dealer took a long time delivering the gold and ended up going out of business owing millions of dollars to customers like Mr. R. The incident was a hard blow, but it taught him the importance of due diligence — had he read reviews he would have seen growing anger at this company not delivering and breaking promises – a lesson he’s unlikely to forget.

5. Falling Victim to Bait and Switch Scams

Navigating the gold market isn’t just about making the right choices — it’s also about avoiding the wrong ones. And bait and switch scams are one such pitfall to evade.

Unfortunately, the gold market isn’t immune to unscrupulous dealers, and we see the feds catching up with at least one major fraudster every year.

Bait and switch is a common scam in which dealers advertise a gold product at a suspiciously low price to attract buyers. Once you’re hooked, they’ll try to switch you to a more expensive product.

A colleague was telling me how his client fell victim to such a scheme. The client was lured with an advertisement for low-priced gold (up to 10oz of gold for spot price), only to be convinced to buy a far more expensive “limited edition” gold coins.

Some time later, the client realized the coins he had bought were overpriced and underperforming in comparison to regular bullion. Always remember, if a deal looks too good to be true, it probably is.

Being aware of such practices can save you a lot of trouble.

6. Overreliance on Promises of Exceptional Returns

It’s no secret that gold can be a profitable investment, a slow and steady favorite that has averaged a 9% annual growth since 1971. But beware of dealers promising extraordinary returns.

Such promises of fast growth, market-beating gains and doubling your money are often a sign of potential scams. The return on gold investments depend on various factors, including market conditions and the type of gold you’re investing in.

Yes, gold prices steadily rise over the longer term but these dealers point out to unique events that are ‘just about to happen’ which will make gold soar. Or they talk of the potential rarity and collectibility in what they are selling leading to epic gains when the rest of the market ‘wakes up’.

Remember, as with bait and switch, if something sounds too good to be true, it probably is. In the gold investment world, promises of sky-high returns should be a major red flag.

Just as the price of gold can increase, it can also decrease. Factors like market conditions, geopolitical events, and economic indicators play a big role in determining the price of gold.

If we REALLY knew when gold was going to shoot up we wouldn’t be selling – we’d be buying!

7. Lack of Diversification

The final bad gold investment strategy is a lack of diversification. We always emphasize to clients that putting all your eggs in one basket is never a good strategy.

Even within the gold investment space, diversification is key. Balance your portfolio with a mix of bullion, coins, gold, silver and even platinum and palladium. Use Gold IRAs. Use different storage facilities, have some of your metals at home close to hand and have the rest at different types of secure storage.

Whilst this isn’t so important for smaller investors in the sub $100,000 range, it becomes more and more important, the more zeroes are added to the invested sum and the size of your portfolio.

Diversify the diversifier. Always.

In Summary

So there you have it – the seven warning signs that you might be making bad gold investments.

Remember, the golden road can be riddled with potential pitfalls, and navigating it requires vigilance, knowledge, and informed decision-making.

But with the right tool and a top-rated gold dealer, you can turn those warning signs into signposts on your journey to financial success.

As always, I’m only here to show you possible directions on this golden path, but the path you take is down to you.

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