A Matter Of Trust

Hello and welcome back to Breaking the Dollar. As always, I am your host Everett Millman and this week's episode is going to focus on a question that I have been hearing a lot lately. And that is, how do you know you can trust your gold dealer? Now I did an interview on the Money Life podcast with Chuck Jaffe a few months ago. It's a great show. If you've never listened to it, check it out. And Chuck was very interested in that exact question. We spent about 80% of the interview talking about ways you can verify how trustworthy a gold dealer is. And at the time, I thought, you know, that's kind of interesting. It's not the normal line of questioning that I get in interviews.

But then a little bit later on, I came across some really fascinating statistics from the World Gold Council, which is basically a big research organization that provides all the up-to-date statistics and data on everything to do with the global gold market. Every quarter, the WGC has a very comprehensive report. And for the third quarter, something they focused on was the sentiment of buyers and investors. How did they feel about gold? And what stood out to me was that about two-thirds of the people who responded to their survey, and this was a massive undertaking, it was like 18,000 people. So for anybody who's into statistics, that is certainly an ample sample size. 66%, nearly two-thirds, said that they were interested in buying gold. They had considered buying gold, but that they did not because they weren't sure who they could trust. And that was kind of an eye-opening statistic to me.

I think being on the inside of the industry and having worked at Gainesville Coins for so long, for about seven years, you do tend to lose sight when you work for a trustworthy organization about what the reality is on the ground. And that there is a trust deficit that a lot of people don't know if they trust that someone is selling them real gold or selling it to them at a fair price. So since doing that interview with Chuck, I've thought about it a bit more, and I would like to address a handful of good signs, the signs that you can trust someone who's a dealer. And then I will also go over a few red flags, things that you should look out for and be very, very wary of if you see a dealer doing this or offering this.

So first and foremost, you obviously don't want to end up buying fake gold. How can you protect yourself from that? I think we have all had the experience of looking at a piece of jewelry and thinking it looked absolutely beautiful and it must be real. And then I either found out it is only gold plated or it was gold of very low purity. And so the point there is that something can be plated in a thin layer of gold and still look real. As a consumer, there is really no good way around that problem. There is a product that we use on site in our showroom called the Sigma Metalytics Precious Metals Analyzer, high-tech device that can not only test the purity of a piece of gold or silver or any other precious metal, but it's also very finely tuned so that it can tell if a coin of a known purity is the right purity. And it does all this without having to dig into the coin or bar.

And that is the main problem with trying to verify if the actual metal is real is that you usually end up having to destroy it in some way. So a lot of jewelers will have a stone that you can rub off a small piece of precious metal on and then test using acid to see if it's real or obviously you could just completely melt it down and test that. Both of those processes are time consuming, they're potentially expensive. And as I said, they completely destroy whatever it is you were testing. So that is probably the first thing. If you go to a gold dealer and they don't have a device like that, that's a bad sign because that means that they are not checking and verifying the gold and silver that they deal with. We have to test every single item that comes through before we will buy it and certainly before we will sell it. If you wanted one for yourself, I believe probably the cheapest model from Sigma Metalytics runs about $1,000. So it is a costly piece of equipment. But if it prevents you from buying one fake gold coin or one fake gold bar that is presumably one ounce, it basically pays for itself in one use.

But that is simply the reality. You really can't get around the fact that it is difficult to tell just by sight or, again, without doing something destructive. If you don't have one of these high-tech tools to tell if your gold is real, there are some horror stories in other countries of there being loads and loads of fake gold bars or a lot of times when you get a trade shows or gun shows. If you are just making trades or swapping things hand to hand, you can get stuck with a fake product. We have had many customers over the years come in and be disappointed to find that they paid $1,300, $1,500 for something that turned out to be tungsten or lead.

So what are some of the other signs that a dealer is trustworthy? Well, this might sound obvious, but you're going to want to buy from someone who has a physical location in addition to online storefront. The reason for that is a simple credibility test that if you are buying and selling precious metals in the market, if you are a bonafide dealer, you're going to need a lot more space to be putting that stuff. You're going to need to have some type of, for lack of a better term, an import-export operation going on. It's not the kind of thing that you could just do out of your own basement. So if you are shopping online, it really is a good idea to stick to places that have a physical location behind them.

Going hand in hand with that is simply the idea that the seller has some kind of reputation, that they have some kind of longevity. On the show, I talk quite a bit about how everything to do with our currency and with financial markets, ultimately it all rests on confidence and trust. Trust is actually the secret sauce that keeps the economy running. And although it is an imperfect ingredient, the same is absolutely true when you're looking specifically at the gold industry. Trust and reputation is paramount. And the reason that longevity is important is because you're not going to last very long in the precious metals business if you aren't a good wholesale partner to the other dealers that you are buying and selling from when you're not selling to the general public. If a dealer has been around for a while and they have that track record, that means that they are at least to some degree getting along with their wholesale partners, that other dealers in the industry also trust them. That's why being a member of certain industry organizations like the ICTA, the Industry Council for Tangible Assets, when it comes to coins, the ANA, the American Numismatic Association, these types of memberships and organizations are a pretty good way of vetting which dealers are trustworthy enough that they get along with their wholesale partners. And then you as a consumer have that extra confidence in them.

And a final note about good signs that someone is a trustworthy dealer is that they openly publish their bid and ask prices. And basically what this means is that the dealer is telling you what their margin is on certain products. And just to put it into simple terms, the bid price is what that dealer would pay you if you wanted to sell that specific item and the ask price is what they would sell it for. And you will find that the spread between those two numbers, the difference between those two prices is very, very small, typically about 1%. And it is an obvious statement that like all good gold dealers, they are willing to buy back every single item that they sell. That would be a major red flag if the bid and ask prices were never published because that other half of the equation, that fact that a gold dealer runs a two-way market where they will buy back any item that they sell, any product that they list that they sell, they will buy back for a slightly lower price but still very close to what they sell it for. That is perhaps your best indication that they are trustworthy and honest.

Now as I point those things out, they do sound a little bit self-evident but I mean, if you don't feel bad if you didn't think of those things or didn't know that because like those World Gold Council statistics I brought up earlier showed, a lot of people, the vast majority, in fact, of people who are interested in investing in precious metals are still a little wary. So there is a lack of knowledge and information about what are the signs of a trustworthy dealer. Perhaps more importantly are the red flags to look out for. How can you tell a dealer might not be trustworthy or might be fraudulent or someone to kind of steer clear of? And probably the best encapsulation of all of these red flags is that if it sounds too good to be true, then it is.

So if you ever see a deal where someone is selling gold below spot price -- and I'm not talking about a one-off thing, I'm saying if a relatively big precious metals dealer is offering their items below spot, that means below their cost. So they are openly losing money on that offer. That should be a red flag. Something that sort of goes hand-in-hand with that is if you see a great deal that seems too good to be true and then that same company uses aggressive sales tactics and starts calling you over and over again to try and push other products. That is something that has definitely happened in this industry, particularly with coins. It's a strategy that tends to target elderly people, basically gets them hooked with one good deal and then they have all of your personal information that you provide to make the purchase and they will essentially cold call that person and try and push them on much, much, much more expensive coins. In almost every case they will be collectibles and they will be at highly inflated prices. That type of sales tactic was more common in the '90s but it still certainly goes on today.

Obviously there is nothing wrong with a dealer calling back a previous customer and offering them something, but if it is a high pressure kind of sales environment and especially if it's a very different product than what that person did buy in the past, those should be setting off some alarm bells. One final thing that has been a bit more of a trend lately that I think is a big red flag, any company that offers gold trading services when that's not how they originally portrayed themselves. And really this same pattern is the crux of what trustworthiness gets at. It's not that trading gold on the internet is anything fraudulent in itself but when a company holds itself up as a physical gold bullion dealer, that they sell coins and bars and actual gold, and then they kind of bait and switch and they want the customer to send them money so that they can trade the gold market, that is an entirely different thing. And granted almost every dealer will have their own trading account so that they can hedge their business: so that for every ounce of gold they sell they can buy one and vice versa, so they can always keep their inventory flush. But when they're offering to do it for the customer, that has to be obvious in front and center. That should not be a secondary marketing tactic or some kind of sales tactic after the fact. Once again it's the type of thing that tends to prey on the elderly and people who really aren't well-informed and they just know that they want to buy gold and they're not sure how to do that, so they are willing to trust whoever is representing that company.

One other thing that I'll add that kind of fits into the "too good to be true" category is any dealer who consistently offers free shipping, because we do live at an age of Amazon where everybody loves that idea. They want their stuff immediately overnight shipping, free shipping, I get it. Trust me when I shop on eBay I do usually filter out and want to find free shipping. There are two main problems with that. One is that the shipping is not really free. It's usually just built into the higher price for the product. And secondly it's almost a similar case of selling gold below spot. There's really no way you should be able to get by and make a profit by doing that. There has to be something else going on, and I can give you an example from my experience at Gainesville Coins is that we do our due diligence. Every single package that we send out not only does it go out in exactly the order that it came in so you don't get to cut in front and line and get your order no matter how big or small but we also take the time to use video surveillance on every single package before it goes out so that there is no dispute about whether or not what you ordered was in your package. If there was a mistake then we have it on camera to verify it and vice versa. All of that due diligence takes time and if you're doing a healthy amount of business it's not realistic to be able to ship to someone overnight for every single product. It just doesn't happen. That does it for today's episode. I hope that you learned a lot on this one and can see some of the reasons that make a gold dealer trustworthy.

We will turn now to our mail bag and take a question from one of the listeners out there. This week's question comes from Heather in Youngstown, Ohio and she asks, I'm hearing that low interest rates are good for gold. Why? That is a good question because it's not immediately obvious that low interest rates should be good for gold but it really is all about a relative comparison. When interest rates are falling, that usually means bond yields are going down and all sorts of savings accounts and investment products will pay a lower yield or dividend. The reason that makes gold more attractive is that gold never pays a dividend. It's always zero. You're losing out or missing out on earning interest when you own gold relative to some of those other financial products. When interest rates are falling (and they are continuing to fall everywhere in the world), that gives gold a little bit of a boost because you're not missing out on as much. You still are missing out a little bit unless, God forbid, we go to negative interest rates -- at which point you're actually gaining by getting 0% yield from gold. But that's the whole thought process behind it.

I want to thank everybody out there for listening. As always, I appreciate not just hearing from you guys' questions but I like that everyone tunes in and really hope you enjoy the show. Please join us next week where we will once again be doing a quick wrap up of what's been going on in the markets in the fourth quarter. So don't miss that one.