There are good gold MLM businesses

"Rip off" with gold investments

May 27, 2011

Direct investments in physical gold are not regulated by financial regulators. This makes the game easier for cheaters and rip-offs.

The unregulated gold investment market

The gold price, which has risen sharply in recent years, and consumers' fear of further financial crises or inflation have resulted in greater demand for gold from investors. As a result, new providers have entered the market for physical gold investments.

In contrast to other financial investments, physical gold is practically not subject to any regulation by the supervisory authorities. Physical precious metals are not financial instruments and are therefore not regulated by the Federal Financial Supervisory Authority (BaFin).

Due to the lack of regulation, there are no restrictions or legal requirements for providers in the field of physical gold investments. While the sale of financial instruments such as investment funds, stocks or insurance is now heavily regulated, physical gold investment products can be sold to investors by virtually anyone. There are no minimum standards for advice or similar regulations.

But it is not just the sale of gold that is unregulated. In contrast to the safekeeping of savings deposits, which requires a banking license, and the safekeeping of shares or investment units in funds, which must be carried out by custodian banks, the safekeeping of gold in vaults or custodians is not subject to any regulation.

Sometimes drastically inflated prices

In 2010, various investigations were carried out in the USA against one of the leading suppliers of gold coins, Goldline International. The investigation by the US Congressman Anthony Weiner came to the conclusion that the average price premium for collector coins was 90% above the material value of gold and 47% higher than that of competitors.

The respected US blogger Barry Ritholz describes the approach of Goldline International and the right-wing populist Glenn Beck, who supports the company, at http://www.ritholtz.com/blog/2010/07/glenn-beck-goldline/:

Goldline sponsors the Glenn Beck radio show and supports it with advertising. Glenn Beck scares listeners of hyperinflation in his program and argues that only ancient coins are safe. He justified this with the fact that investment gold was confiscated in the USA in 1933. Then he promotes Goldline and calls for people to trust the people there.

Customers who speak to Goldline employees will then be advised to talk about collector coins. Since collector coins could have a collector's value in addition to gold, their prices are difficult for investors to estimate. However, many of the collector coins sold have little or no actual collector value. The alleged collector's value is apparently used to sell the gold at inflated prices.

In the event of a real crisis, it can also be assumed that a previously actually existing collector's value would also fall sharply.

This scam is not only common in the USA. There are also black sheep in Germany. The Swiss company KB Gold, which operates in Germany, has a dubious reputation. For example, it was criticized in 2010 in a report entitled Die Goldgauner on the program Frontal21 on ZDF.

Unlike Goldline, KB Gold does not sell overpriced collector coins, but rather very small gold bars from 0.5g to 2g. According to the KB Gold video, gold bars have been “the world currency and means of payment in all countries on earth for 2600 years”. Due to the small size of the bars, KB Gold demands high premiums compared to the pure material value of the bars.

KB Gold justifies the purchase of small and therefore expensive gold bars by stating that gold is lost when large bars are remelted into small bars. "That's why only the smallest units make sense from the start," claims KB Gold in a company video. In addition, only the smallest units are recommended to customers, as they would give them the greatest freedom of action. KB Gold prides itself on the fact that the gold bars are licensed and that they are “currency gold bars”. The bars of KB Gold are generally not recognized by banks, for example. In case of doubt, the buyer of a KB gold bar can only sell it back to KB Gold - albeit at a significant price discount - or sell it as scrap gold and thus again at significantly lower prices. The claim that these are globally accepted currency gold bars is a marketing gimmick.

Multi level marketing companies

The high surcharges that dubious providers of gold investment products charge are attractive for so-called MLM distributors. MLM stands for Multi Level Marketing, also known as “Network Marketing” and therefore in the best case for structured sales and in the worst case for so-called pyramid schemes.

MLM or structured sales are based on the concept that the founders gain participants who sell a product to customers, including among their own circle of friends. Whoever is at the top of the pyramid, i.e. who joined the team earlier than the following employee, receives a share of the sales of the employees recruited later as well as the participants recruited by these employees - hence the term pyramid.

In some cases, recruited employees must first pay a membership fee or a deposit. With fraudulent providers, it's often only about this post. The early members at the top of the pyramid earn from the contribution of the later members. The later recruited members try desperately to find new "stupid" ones. At some point this will no longer work and the pyramid scheme will collapse.

Even if it doesn't have to end so badly in every case: Structural sales organizations regularly work to persuade customers to buy frequently overpriced products through personal contact. In the context of financial services, the fear of customers is often used.

Over the past few years, the sale of financial services has been regulated more and more, making it less attractive for black sheep. As shown above, this does not yet apply to gold. This seems to increasingly attract untrustworthy figures. And the rhetorical salespeople know how to take advantage of the widespread concerns about inflation and national bankruptcy.

One example is the self-proclaimed “gold coach” Dennis Nowak from My Inc. He speaks openly in a company video that “gold is the most ingenious multi-level marketing product of all time”. He justified this with statements such as: “The requirements [in the financial services sector] that have to be met today are rock-hard” or “you have no chance with insurance products” and “You don't need approval for this business [with the gold], it there is no advisor liability ”.

Customers of MLM distributors usually pay excessive prices. In some cases they will also be caught in a pyramid scheme or it will later be found out that in the case of supposedly safe gold holdings, in reality there is no gold at all.

Dubious online shops: gold never arrives

Another source of fraud against buyers of gold investment products are fraudulent online shops pretending to be selling gold coins and gold bars. In addition to many reputable providers who are active on the Internet, there are also black sheep here.

These are usually located abroad and also have their website operated on servers abroad. This is not immediately obvious to the gold buyer, because the fraudulent online shops are well camouflaged, adorned with all kinds of certificates and good reviews. Customers pay in advance and, in the worst case, will not receive any gold sent and their money will not be refunded.

Problematic providers of gold currencies

Providers of digital gold currencies offer their customers a form of electronic money based on gold. A unit of the respective gold currency stands for a certain amount of gold. Customers can send amounts in the digital gold currency to other customers, i.e. actually pay with them. An exchange in normal currencies is possible and often also the delivery of the gold.

Providers of digital gold currencies are usually only subject to low levels of regulation. In the past, this has resulted in various providers collapsing, among other things because they misappropriated customer funds. One example, according to Wikipedia, is INTGold. Wikipedia provides more information on digital gold currencies.

Even with regulated gold funds there are overpriced offers

Investment funds that invest investor funds in physical gold, as well as gold-backed securities, are subject to legal regulation.

But there are also big price differences for these products: while products such as Xetra Gold or Gold Certificates are available for low premiums of usually less than one percent, classic investment funds such as HansaGold are sold with sales premiums of four percent or more. Since the products are a passive investment in only one asset class and product, such premiums are difficult to justify to customers. The reason for the pricing is apparently to be able to secure an attractive commission for financial representatives.

Conclusion: easy game for fraudsters and rip-offs

The lack of regulation of physical gold investment products is currently making it easy for fraudsters and rip-offs. Legal changes are still not in sight. For the investor who is interested in a gold investment, it remains important to carefully study and compare the various providers and offers.

 


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