In April 2014, a Senate Special Committee on Aging conducted hearings on "the perils of the precious metals market." Among the fraudulent practices identified by the Federal Trade Commission during these hearings was the practice of "swapping."

As the Director of the Southwest Region of the Federal Trade Commission told the committee, "[m]any consumers reported that they received daily calls from their "broker" advising them to sell one metal and invest in another or to expand their holdings of a particular metal. Each of these transactions generated additional fees for the telemarketer, while eroding the consumer's equity and making it more difficult for the consumer to earn a profit." ("PREPARED STATEMENT OF THE FEDERAL TRADE COMMISSION on EXPLORING THE PERILS OF THE PRECIOUS METALS MARKET," 4/30/14.)

The practice of swapping precious metals can quickly erode an owner's investment due to the costs involved with each purchase and sale. This is largely due to the "spread" that investors pay for each transaction.

A "spread" refers to the difference between the selling price of the precious metal (often called the "ask price" by dealers) and the buyback price (often called the "bid price"). For example, if an investor purchases a gold coin for $1000 and the dealer's buyback for that same coin is $700, there is a spread of 30%.  

When an investor is convinced to swap his or her precious metals, the spread is paid again on the new purchase. So, using our example above, during a swap the investor is convinced to sell the gold coin that was originally purchased for $1000 for $700 and to use the $700 to buy another coin. However, if that new coin also has a 30% spread, the new coin would have to appreciate 96% just to break even!

Investors should be wary of any sales pitch which encourages them to swap one precious metal for another. Make sure you understand all of the costs involved when you buy and sell your precious metals and require the dealer to put all of the information in writing. Goldline provides a free checklist to allow you to compare different dealers you can download here.

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