In early 2009, David Reed was arrested in connection with a Ponzi Scheme involving investments that were said to be backed by offshore reserves of gold. Had his company, OSGold, been buying gold bullion in such large quantities, the activity would have alerted regulators. But, seven years ago, his activities were found to be based upon no such reserves. He's been a fugitive in Mexico ever since, only being arrested when visiting the US.

These types of fraud carry massive penalties, with up to 40 years in a federal prison as a possible sentence for the scheme that brought Reed and his partners nearly 13 million dollars in funds thought to be a sound gold bullion investment in both bullion coins and bars. It is ironic that gold bullion investing, thought to be the quintessentially safe investment in times of trouble is now being exposed as potentially shady as investors are complaining about not having access to the physical gold they hold deed to.

However rare this type of fraud may be, the virtual world of gold trading is rife with fraud outside the certified 24k gold bars and 99.99% pure gold coins that are issued by major world mints. While the physical properties of gold make it difficult to practically counterfeit when investors are on hand to actually handle the coins before they actually buy gold. For this reason, many who are concerned about safely buying gold bullion will make their purchases at coin dealer shops or trade fairs.

In the scheme that Reed ran, unreasonably high rates of return were guaranteed by virtue of gains made trading the gold around the world and playing the currency markets. While such trading could legitimately result in some large gains, they would not likely be very consistent. Investors in this particular scheme did not receive any of their money back after the fraud was exposed and Reed fled the country to avoid prosecution.

The current king of Ponzi Schemes, Bernie Madoff, has also been charged with claiming that he was trading in commodity futures, including both silver and gold bullion. Investing on such a scale, again, would have been noticed by regulators, especially as the amount of money in his imaginary investment fund worth about $50 billion.

Of course, investors who are fierce about always staying physical when buying gold bullion have nothing to worry about. Whether you purchase bullion bars or tiny fractional gold coins, the physical nature of these investments makes it certain that they exist, as long as you're capable of keeping them from being stolen.

Those who do keep physical gold have a great many different ways to hide gold in their houses or even on their persons. One elderly woman reported great success storing her gold Eagle coins in jars of peanut butter. As long as you don't forget where you've put them, buying gold bullion and storing it might just allow you to sit back and laugh as scores of gold contracts held in remote places are exposed as fraud while increasing numbers of gold ETF investors begin to demand to see “their” gold.

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Linda Hess

March 24, 2009