Gold bugs like to think they have all their bases covered. The price of the precious metal can only go up whether the economy is facing inflation or deflation, or so they claim.
But beyond the lack of evidence for the metal's value thriving in either scenario, gold investors now face a situation that even they can't put a positive spin on. Major gold vendors like Goldline are coming under rapidly rising scrutiny for steering customers into coins with markups of 35 percent.
Salespeople imply that investors could exploit a loophole for antique coins to avoid a government confiscation of gold that supposedly took place during the Great Depression. But investors who try to sell the coins see a sharp drop as the market value tends to be less the huge profits pocketed by the vendor.
Fear-Mongering and Conflicts of Interest
Fear-mongering by those who, like Fox News host Glenn Beck, have lucrative deals with gold vendors has been causing angst about conflicts of interest for months. But reports of customers getting put into investments that lose a third of their value upon purchase are causing a new sense of alarm.
A recent episode of ABC's Nightline, for example, profiles a 63-year-old investor who got only $2,900 for coins he paid $5,000 for just months prior to selling them. Authorities in Los Angeles say they have received over a hundred customer complaints and have launched an investigation of Goldline and Superior Gold Group.
Adam Radinsky from the Santa Monica, Calif., City Attorney's office told ABC that there have mainly been two types of complaints: customers who said they were lied to and misled into their purchases of gold coins, and those who said they received something different from what they had ordered
Prices Could Turn Down Sharply
While Goldline executives like to advertise that they have $500 million in sales, it remains unclear what portion of these come from items like coins with steep markups. But if consumer sentiment sours, the momentum in gold prices could turn much more violently than even other volatile investments like stocks and real estate.
Unlike those assets, gold generates no income, and judging its worth is a guessing game. This helps boost prices when they're on an upward swing. But when the tide turns, there's no measure like price-to-earnings ratios with stocks, or rental-versus-purchase calculations with houses, to help provide support against a price crash.
Despite the all-encompassing claims made by its advocates, gold may turn out to be a good investment for only one scenario — when gold prices just happen to be rising.