Reality Check: What is actually happening when your metals dealer says: you purchased gold, you should have purchased silver.

If your precious metals dealer encourages you to sell one metal and invest in another, for any reason whatsoever, they are attempting to engage in a practice known as “swapping.” To be clear, they are trying to take advantage of you to increase their profitability, while eroding the value of your precious metals investment.

The beginning of a swap transaction sounds something like this, “I understand you purchased gold however, silver is positioned to experience significant growth over the next five years. I can provide you with an opportunity to exchange your gold for silver, with no additional out of pocket money.” If you decide to move forward with exchanging your gold for silver, what happens next is your investment is eroded largely due to the “spread” related to each swap transaction. The “spread” refers to the difference between the selling price of the metal (also called the “ask price”) and the buy-back price (also called the “bid price”). By way of example, if the ask/selling price of the metal is $2,000, and the bid/buyback price of the metal is $1,500, the spread associated with your purchase is 25%.

Using the example above, the dealer has you sell your gold, originally purchased for $2,000, back to them for $1,500. You then use the $1,500 in a new transaction to purchaser silver. If the silver you purchase also carries a 25% spread, the break-even point for your new acquisition will have increased to 77.78%. In other words, your newly acquired silver will have to increase in value by 77.78% in order for you to break even on your initial investment. It’s a horrible consequence for unsuspecting investors.

Acquiring precious metals should be an exciting and rewarding experience where transparency and honesty are fundamental elements of the dealer-client relationship. You deserve nothing less.

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