SCAM WATCH: What is the Leverage or Interest Trap?

scam, leverage trap, financing goldQ: What’s the Interest trap? Why is it never a good idea to finance gold purchases?

A: The Leverage scam goes like this: You see an ad in a newspaper or magazine saying, “Own $10,000 worth of gold for only $2,000.” You call the company, and they tell you they have a deal where you can buy $10,000 worth of gold with only $2,000 down and they’ll finance the rest. Seems great! Since precious metals are rising, you get to juice your returns and use leverage.

The first problem with this scam is that you have fees and interest. Whether gold goes up or down, you’re paying interest on the borrowed money. If gold goes down just 5%, you would lose 25% of your money instantly and likely have the broker calling you to insist you send more cash over. The second problem is that you don’t get to hold the metals. You’ve effectively bought a contract (paper gold).

One of the reasons to buy gold and silver is to eliminate the counter- party risk. Buying with leverage seems like a way to get extra return, but there’s a reason it’s being offered. It’s a winner for the dealer. In this case the dealer is the same as a casino. And just like a casino, the house always wins.