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"Gold" Stocks—Some Investments Mine Your Pocketbook
The price of gold bullion—which recently touched an all-time high—has sparked considerable interest in gold investing, not to mention aggressive marketing and advertising of gold investments, including gold stocks. And even a cursory Internet search will pull up numerous websites, blog posts, investment newsletters and social media posts (including YouTube videos and Tweets) devoted to the topic of investing in gold.

But some of the stocks and opportunities being promoted have precious little value, and others are outright frauds. For example, the Commodity Futures Trading Commission (CFTC) took three separate actions against precious metals firms engaged in various schemes involving investments in gold, silver and other precious metals. In one action, the CFTC charged a precious metals firm in Florida with running a boiler room fraud that bilked investors out of more than $23 million.

As with other commodities, there are prudent and not-so-prudent ways to invest in gold. We are issuing this Alert to warn investors about investment scams that promote the latest "hot" gold stock and to provide information on how to invest wisely in gold.

Spotting "Gold" Stock Scams

Many gold-related investment scams involve the stocks of gold mining and/or exploration companies. The stock value is often based on gold reserves that are difficult to estimate, much less verify. While stock promoters regularly cite the potential value of a gold reserve, some statements can be deliberately misleading. For example, in 2010, the Securities and Exchange Commission (SEC) took legal action against a mining company based in Florida for false press releases and other misleading statements associated, in part, with a mining project in Ecuador. The releases claimed the gold reserves were worth more than $1 billion. The SEC noted that the exact value of those reserves could not be known “without further detailed exploration.”

Warning signs related to gold stocks include:

Price targets or predictions of swift and exponential growth. These predictions often are based on gold reserves, the actual existence and true size of which are next to impossible to verify. A company recently claimed that its mine in Nevada contained “approximately 2.14 million ounces of gold equivalent resources,” with an estimated market value of over $2 billion. Based on these reserves, the company touted in one of its promotions that an investment “Could turn $10,000 into $384,600.”

References to being a “buyout target” for other mining companies. One company claiming gold reserves valued at more than $112 billion declared in an Internet promotion that it was a “PRIME BUYOUT TARGET” at a buyout price that was 15 to 35 times its current value, which was around a dollar.

Claims that tie stock performance to the general rise in gold prices. Stock prices tend to rise or fall for a host of reasons, such as overall market conditions, sector performance and an individual company’s earnings. A rise in gold prices does not guarantee a rise in the price of a gold company’s stock—there might be little or no correlation between these two things.

Scare tactics such as the threat of inflation or an economic meltdown. While some investors might hold gold as a hedge against inflation or economic uncertainty, owning a gold stock does not automatically serve that same function. Scare tactics are often used to push an investor to make a quick decision.

Speculative claims based on a new reserve’s proximity to an existing reserve. A company recently stated in one of its promotional materials that its mining property could be worth “billions in unrecovered gold” based “on the success of its neighbors.” Without more information, such an assertion amounts to little more than idle speculation.

A change in the company's name or trading symbol to align it more closely with gold. One company that currently purports to engage in gold mining and exploration was originally incorporated with a business strategy to provide golfing opportunities on private courses to nonmembers. Another’s original focus was to establish health spas in urban areas. Yet another cited its original business plan was to develop, manufacture and sell commercial feed to nurture the Chinese mitten-handed crab. Name changes are reported through SEC Form 8-K, which you can find by using the SEC's EDGAR database.

Fool’s Gold for Lunch

Be wary of “free lunch” programs that purport to provide educational information about gold investing. In June 2010, the SEC charged six individuals with running a Ponzi scheme that bilked more than 3,000 investors out of $300 million. The fraudsters, none of whom were registered to sell securities, claimed to represent an independent financial education firm that had discovered a way to earn up to 36 percent annual returns by investing in mining investments that were “fully collateralized by gold.” Rather than invest the money, the firm’s salesmen used the assets on lavish home renovations, mortgage payments for members of their extended family and the purchase of a luxury fishing resort in South America.

In addition, be mindful of warning signs common to many stock scams:

Claims that making profits in gold are "easy."

The use of headlines from respected financial news sources regarding gold, which can easily be taken out of context.

Mention of the names of major investors or investment institutions that provide an air of credibility.

Statements about how much easier it is for lower-priced stocks to skyrocket in value in comparison to higher-priced stocks.

Pressure to invest immediately.

Smart Tips

To avoid potential gold stock scams:

Investigate before you invest. Never rely solely on information you receive in an unsolicited fax or email. It's easy for companies or their promoters to make exaggerated claims about new products, lucrative contracts, or the company's revenue, profits, or future stock price. Be wary of claims about significant mineral reserves or mining operations in countries far removed from the U.S. that make it difficult to verify such claims through independent research.

Always ask: "Why me?" Why would a total stranger tell you about a really great investment opportunity? The answer is that there is no such opportunity. In many email, fax and online scams, those who tout the stock are corporate insiders, paid promoters or substantial shareholders who stand to profit handsomely if the company's stock price goes up.

Read a company's SEC filings, if available. Most public companies file reports with the SEC. Check the SEC's EDGAR database to find out whether the company files with the SEC. Read the reports and verify any information you have heard about the company. But remember that just because a company has registered its securities or has filed reports with the SEC, it doesn't mean that it will be a good investment.

http://www.finra.org/Newsroom/NewsReleases/2011/P124214