Beware Gold Coin Rip-off

January 4, 2011

Gold coins are touted as a good hedge against impending financial doom. Now, a recent television ad by “National Collector’s Mint” offers consumers coins with “pure gold,” specifically the “2011 Buffalo Tribute Proof.” But how good a deal are these “gold coins”?

Gold has shown an increase in value over the past year, going from about $1,100 per troy ounce (31.1035 grams) to over $1,400 per troy ounce, an increase of over 27%. Popular commentators such as Glenn Beck have touted the purchase of gold coins as a safe haven against our troubled economy.

The ad describes the historic $50 Buffalo Gold Coin, the first 24 karat gold coin minted by the United States, and offers this “tribute copy” of the popular collector’s and investment item. The ad states that the gold in the coins for sale is 0.9999 percent pure gold, and “your own copy of the $50 Gold Buffalo” can be bought for only $9.95.  A year ago, the earlier version of the same coin by “National Collector’s Mint” sold for $19.95, so this is an even better deal, right? No wonder purchases are limited to five per caller.

A very careful review of the new gold coin ads, however,  reveals that the advertised “Buffalo Tribute Proofs” are actually “gold-clad coins.” Rather than pure gold coins, they are actually what amounts to gold-plated coins. Listen carefully and you will and you will learn that the actual content of gold in each coin is 14 milligrams. That’s 14/1000th of a gram!

Please do the math, dear consumer. At $1,400 per ounce, that means the gold in these coins is actually worth 63 cents! At $9.95 per coin, that’s quite a markup.

The ads state that because “supplies are limited,” purchases will be limited to only five per customer, and the price can be guaranteed for only seven days. So those unfortunate enough to snatch up five of these coins will get $3.15 worth of gold for “only” $49.75! Interestingly, a year ago when pure gold sold at a lower price, this same company sold the same “Buffalo Tribute Proof” for $19.95. That earlier coin had a whopping 31 milligrams, worth $1.10 back then, about the same comparatively poor deal.

An actual “$50 Buffalo Gold Proof” coin is priced by the U.S. Mint at $11,060.

Buying gold can be a sensible investment for some people. Like anything else, it is an investment with risk. If you buy gold now at the current high of $1,400, and it dips back down to 2009 levels, you could lose your shirt. During a span of several months in 2008, gold went from $1,000 to $700. Just as many learned from the real estate bubble, gold prices (like real estate) don’t always go up.

If you are considering buying gold as an investment, be sure to watch out for common scams in this market. Here are the top five:

  1. Grade – True gold coins are graded, and prices can fluctuate greatly based on the grade assigned. A “mint condition” Gold Eagle coin can sell for $2,850, whereas the price of the same coin graded “very clean” (indiscernible to the amateur eye) can be $1,650. How honest is the assigned grade?
  2. Presentation – Be wary of gold coins encased in nice looking packages or coatings that prevent you from actually examining the coin. The seller might be hiding something.
  3. Gold Indexes – Some gold indexes cannot be trusted. The investment bank Salomon Brothers used to compile a gold index showing huge annual appreciation figures for gold coins, but these were based on a set of very rare coins, not the type commonly sold.
  4. Gold held in escrow – Afraid of losing your precious gold to robbers? Don’t worry, the helpful seller will hold the gold for you. Are you sure it even exists?
  5. Government seizure – In 1933, the government seized gold held in bank deposits, paying $20.67 per ounce per executive order. It is highly unlikely, but not impossible, that future circumstances could result in similar action.

Now we can add yet another potential scam to this list. Listen carefully, be sure to read all of the fine print, and do the simple calculation yourself. How much are you really paying for the actual gold in the coin?