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Gold Scam

A gold scam is either 1. downright fraud, 2. misrepresentation or 3. market manipulation. To be knowledgeable about gold scams is necessary to anticipate and avoid them.

The Gambling Den Oil Painting Jean Eugene Buland Gold Scam

First, Fraud

Buying scrap gold (old jewellery) for only half or less of the gold price can be considered as fraud. Typically, businessmen having this in mind announce their scrap gold sale in local radio stations and rent a hotel lobby on a Saturday morning for this purpose.

Another way of fraud is selling gold numismatic coins at prices which highly surpass the material and collector’s value. The victims are often old people who can easily be tricked into this business deal.

From time to time Nigeria emails arrive in the inbox. Here, a businessman with connections to Nigerian gold mine tries to sell gold by the kilo for prices that are far lower than the current gold rate. Of course, this was a legal business and gold export licenses did exist. The only catch, for the transaction it is necessary to fly to Nigeria. (It is up to the email recipient to decide whether this is a genuine business opportunity.)

There is also a (very) slim change that gold buyers receive inferior gold, referring to a lower value or fineness.

Second, Misrepresentation

Imagine, a bank sells gold which the buyer never physically receives, but which is stored in the bank’s vault. The bank further charges the gold owner storage fees. So fine so good. Let’s now assume the owner of the precious metal insists on seeing the gold. Now it is discovered that the bank never actually possessed the gold. How would one call the bank that asked for storage fees of something it never stored? Do you think this incident is highly hypothetical, or would happen only in dodgy countries?

Well, this allegedly happened at the bank Morgan Stanley.  In 2005 a class-action suit was filed against Morgan Stanley. The bank was accused of selling between 1986 and 2005 physical gold and other precious metal to clients who paid fees for storage at this bank. But allegedly Morgan Stanley either made no or a different investment on behalf of its clients. The result was that Morgan Stanley would pay US$ 4.4m to settle this class action suit. “While we deny the allegations, we settled the case to avoid the cost and distraction of continued litigation,” Morgan Stanley said in a statement. See a Reuter’s article about this case.

Third, Market Manipulation

The last gold scam is market manipulation as this action tries to distort the market equilibrium.

For example, in the beginning of 2007 there was an incident regarding naked short-selling among stocks of smaller mining companies.  Here, shares were massively sold to force the price of the shares down.

Also, governments could be labelled as market manipulators if the restrict the free trade of gold. Vietnam is such as case. In the beginning of 2011 it was reported that the government had plans to ban the trade of gold bars on the free market.

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