A Closer Look at Alternative Investments: Precious Metals

By Michael Williford, Spring 2016 Student Intern

To wrap up the alternative investment series, today I’ll focus on a subset of commodities that belongs to the larger class of alternative investments referred to as “real assets;” specifically, precious metals.

The volatility in the larger stock market that resulted from the collapse of the derivatives securities focused on the housing market led to a rise in precious metal investments. Precious metals were, and remain appealing to investors because they seem to promise a safe, stable place to invest when the stock market fluctuates. We’ve all seen the commercials, but maybe we haven’t thought as much about the risk.

With the increase in precious metal investments came fraud. In December of 2014, FINRA issued an investor alert concerning the risks associated with investing in precious metals. FINRA identified high pressure sales tactics and outright fraud as two areas of major concern, highlighting federal court decisions punishing one Florida firm for engaging in illegal, off-exchange precious metal transactions, and another firm for engaging in fraud the court called “repeated, callous, and blatant.”

Precious metals investments are not always inappropriate, however. FINRA cautions they can play a “helpful role in building a diversified portfolio” and offers five tips to avoid falling victim to scammers. Specifically, FINRA advises investors to (1) say no to pushy sales people—no reputable firm will ever use high pressure tactics to get you to invest; (2) perform a background check on the salesperson before you invest—you can do that here; (3) Be suspicious any time you hear an investment is “low risk”—storage charges, price fluctuations and the use of loans to investors to purchase precious metals can quickly undo any progress you make; (4) the risk of leverage—those loans used to purchase your investment. Purchases “on margin” ae subject to a “margin call” that can require an investor to contribute additional monies if the value of the investment declines; and (5) Fees, fees, fees—like most investments with a broker, precious metals investments may include account opening fees that can run into the hundreds of dollars, commissions that can run as high as 15% of your investment, and ongoing management and storage fees discussed above. Together, fees can sap the returns an investor earns, leading to a situation where the only person who benefits from your investment is the broker of firm.

As always, do your homework before you invest, and carefully read the offering documents associated with any investment you’re considering.