Pyramid Scemes Afloat

A scam doesn't need to be hosted in the Third World to take root. Lately, there's been a pyramid scheme floating about for physical silver... and one might be out there for gold. In essence, the scheme works this way: a person get in at the bottom of the pyramid by paying a too-high price for silver coins. He or she is then told to bring in other buyers at even more ridiculous prices and gets a small cut of the sales proceeds. As the hopeful profiter moves up the chain, (s)he is promised to make enough to pay for the coins.

Needless to say, this scheme's illegal. There's only one way for its participants to come out whole: if silver moves insanely high, high enough to justify the exorbiant prices. Even if so, silver had better stay up or move even higher. A bull market of that magnitude is likely to fall apart.

The whistle-blower is Mike Maloney of GoldSilver.com. He offers these tips on how to spot a pyramid scheme:

1. Beware of plans with exaggerated earnings claims, especially when there are no underlying product sales or investment profits.

2. Be careful of any plan that offers commissions for recruiting new sellers, particularly when there is no product involved or when there is a distinct, up-front membership fee. Also don’t assume that a presence of products or services, removes all danger. The Federal Trade Commission has caught pyramids offering investment opportunities, charity benefits, off-shore credit cards, jewelry, women's underclothing, makeups, cleaning supplies, and even energy.

3. If a plan purports to sell a product or service, check to see whether its price is inflated, if new members must buy costly inventory, or whether members make most "sales" to other members instead of the public. If these conditions exist, the purported "sale" of the product or service may simply mask a pyramid scheme that promotes an endless chain of recruiting and inventory loading.

4. Beware of programs that claim to have secret plans, foreign connections or special relationships that are difficult to verify.

5. Beware of any plans that delay meeting its commitments while asking members to hang in there. Many pyramid schemes advertise that they are in the preliminary launch phase, yet they never can nor do launch for by definition a pyramid scheme can never fulfill its obligations to all its participants. To survive, pyramids need to keep and attract as many members as possible. Thus, promoters try to appeal to a sense of community or solidarity keeping its marketing arm intact, while rebuking outsiders or doubters.

6. Finally, beware of programs that attempt to capitalize on the public's interest in newly deregulated markets or high technology.

Bottom Line: Every investor fantasizes about becoming wealthy overnight, but in fact, getting rich is usually the result of enterprising ideas and hard intelligent work. If it sounds too good to be true, chances are high that a con is going on.

There's a broad way to spot something fishy in a deal. If the price is well below spot or well above spot, something's wrong. It's one thing for a dealer to sell semi-numismatic coins at well above spot - that's why they're called semi-numismatic - but it's another thing entirely for a company to sell the same coin that can be bought just above spot for far more than spot (or less that spot.) Getting gold around spot, and not deviating from that goal, is the best protection against scams - provided that common sense is followed when buying from a stranger. Buyer protection like that offered by a credit card or PayPal is part of that common-sense system.