American Greed

Gold 101: Digging for opportunity? Here's what to know

How to shine if you think now may be the time to buy gold

The concept is as old as money itself. In uncertain times, it is wise to own gold.

The precious metal "typically serves as a hedge against inflation or a weakening dollar," Douglas Boneparth, a New York-based Certified Financial Planner and a CNBC contributor, said in an interview with "American Greed." "It's also used as a store of value."

But what is the basis for that theory? And does it still apply in an era of cryptocurrencies, where U.S. inflation has hovered in the low single digits for nearly 20 years? There are about as many opinions about the relative value of gold as there are investors in the markets. Regardless, the near-mystical allure of gold has not waned.

"The thinking is that historically gold has been used throughout time to barter goods. It has kind of a historical component to it," Boneparth said. "This is what we make our jewelry out of. This is something that generally denotes value."

Of course, gold has also been known to attract con artists who harness its awesome power to rip off unsuspecting victims. Charles Larry Bates persuaded hundreds of people to hand over some $18 million, supposedly for gold and silver coins, using an apocalyptic appeal.

"His target market was Christians," David Pritchard, an assistant U.S. attorney in Memphis, Tennessee, told "American Greed." "He talked about how it's predicted that troubled times are coming, and he would talk about how the Bible advocates for the importance of gold."

The trouble was that Bates did not have the gold to deliver, leaving many victims with nothing.

One of them was Lynn Benson, who turned over her life's savings to Bates, got a fraction of the gold she purchased in return, and died virtually penniless.

"She wanted to take care of us and pass on an inheritance to her kids and grandkids," her son Joshua told "American Greed." "She looked forward so much to having grandkids, and unfortunately she was not able to meet them."

Bates, 74, is serving a 21-year federal prison sentence after being convicted last year on 46 counts of fraud and conspiracy.

Safe haven

Of course, there is no shortage of legitimate ways to invest in gold, which is gaining some new attention lately due to global instability, as well as the potential inflationary effects of a growing economy and an escalating trade war. Gold prices may be lower these days in the face of a soaring stock market, but trading volume has been trending higher.

Investors traditionally look to gold as a safe haven because its performance tends to be predictable. If the dollar or the stock market decline in value, gold typically rises as people look for a place to preserve their wealth. As a result, your financial advisor might suggest you own gold as a sort of insurance policy against market declines.

"Buying gold has typically paid off in times that haven't been so good, whether that is the Great Depression, or whether the dollar has gone up rampantly due to inflation," Boneparth said.

But while the price of gold tends to move in the opposite direction of stocks, the returns on your investments are less predictable. In the past 10 years, for example — a period that included the 2008 financial crisis and the Great Recession — the price of gold has risen a respectable 32 percent. But the stock market as measured by the Standard and Poor's 500 Index has blown away that performance, rising more than 150 percent.

What's more, the price of gold is more closely tied to emotion than are many other types of investments — the supply of gold is relatively constant; it is the demand that fluctuates. That means that despite its reputation for safety, gold prices can turn quickly.

"Investing in gold does pose its risks just like any other investment," Boneparth said.

Because of that, experts agree that even if you believe in the theory that gold is the ultimate storehouse of value, it should only make up a portion of your holdings.

"Too much of any one thing would bring us away from diversification," Boneparth said.

That is why con artists like Bates, who pitched precious metals above all else, do so much damage.

"Gold and silver is money," he would tell attendees at his seminars. "Anything else is credit."

Even if Bates had been able to deliver all of the metal his investors thought they had purchased, those who followed his advice were taking undue risks.

Solid strategies

If you and your financial advisor see a place for gold in your holdings, how do you buy it? These days, there are plenty of options.

The "purest" way to own gold is to own pure gold bullion, which is formed into the familiar gold bars or coins. The United States Mint produces American Eagle coins in gold, silver, platinum or palladium bullion. The Mint does not sell the coins directly to the public. Rather, it distributes them to a network of authorized purchasers who market them to the rest of us.

But owning bullion — or other physical gold, like jewelry — carries an extra cost.

"You actually have to store it, protect it, insure it," Boneparth said.

There are also ways of owning gold that do not require you to take physical possession of the metal.

Gold futures contracts, as the name implies, are agreements to take delivery of a set quantity of gold at a future date. Trading on the CME Group's Comex, each contract is worth 100 troy ounces of gold, or about $120,000 at today's prices. But because the exchange requires only a fraction of that amount upfront — known as margin — investors can control a large amount of gold with a relatively small investment. But remember, gold prices can be fickle, making gold futures a risky business meant for more sophisticated investors.

Instead, many people opt for exchange-traded funds. ETFs are securities that represent a basket of investments similar to a mutual fund, but trade throughout the market day like stocks. The most popular gold ETF is SPDR Gold Shares. They trade on the electronic NYSE Arca platform, which means you can buy and sell them through a standard brokerage account. Investors in the fund own shares of a $28 billion cache of physical gold controlled by the World Gold Council. Each share represents one-tenth of an ounce of gold.

Another strategy is to invest in companies that are in the gold business, like mining companies. The theory is that the share prices tend to mirror the price of gold, but with some of the added benefits stocks provide, such as corporate dividends. But beware, because the approach could defeat your original purpose for buying gold — diversifying your investments.

"What you're doing at this point is buying the company — its expenses, its liabilities, its cash flows — when perhaps what you really want to do is just own gold," Boneparth said.

Cashing in

The timeless allure of gold means there will pretty much always be someone willing to buy yours. But receiving a fair price for your holdings is another issue.

In the case of exchange-traded products like futures and ETFs, it is up to you — with the help of a trusted financial advisor — to decide when market conditions are right to cash in. Be careful not to get caught up in the emotions that are so prevalent in the gold market, and remember to keep considering gold in the context of your other investments.

When it comes to physical gold, cashing in can be easy as well.

"You can drive through most downtowns in America and find a jewelry store or a cash-for-gold place that will literally take your gold and convert it to cash," Boneparth said.

You will likely receive a bit less than the prevailing market price for your gold — these merchants need to make a living, after all — but do not hesitate to shop around to get the best price.

Whether buying, selling or holding gold, it is important to maintain perspective. You are dealing in a commodity that people have prized for more than 5,000 years. Wars have been fought over it, and gold scams are a dime a dozen. Gold is unlikely to make you rich, but if you handle it right, it could keep you from being poor.

See how Larry Bates preached his false gospel of gold and breached the faith of hundreds of victims. Watch an ALL NEW episode of "American Greed," Monday, Oct. 1 at 10pm ET/PT. And grab yourself a little extra Greed anytime by subscribing to the American Greed Podcast.