IT started with a call ``out of the blue'' last August. She was friendly, professional - and persistent. Every day for more than a week, she called a Troy, Mich., couple urgently offering a no-lose opportunity to make $30,000 in ``just a few weeks.'' Finally, the couple relented. They sent in $10,850 as a down payment on a bank loan to buy about $30,000 worth of silver and platinum. A California bank would store the metals for ``a small fee,'' they were told. And in a few weeks, when the price of the metals went up, they could sell out for a big profit.
Shortly after closing the deal, the saleswoman was ``promoted'' and never heard from again. She never mentioned her 7 and 13 percent commission fees on the full value of the metals. Nor the $700 bank loan charge every six months. Nor the silver ``overage'' expenses.
In the first six months, the Troy couple has shelled out $4,800 in dealer commissions and bank fees on top of the original investment. The bank still has the metal. State regulators are investigating the case and have withheld the names of the parties involved.
But in a letter to regulators the investors themselves say: ``We don't see how we will ever even get all of our money back (much less make a profit!) with every day costing us more money.''
It's not an uncommon complaint. Often, ``The overall effect is to generate funds for a sales organization and fees for the financial institution but nothing for the investor,'' Florida's state comptroller, Gerald Lewis, said in a letter to federal regulators.
What's the appeal then? In a legitimate deal, a $2,000 (20 percent) down payment can secure $10,000 worth of gold bullion. This leveraged purchase gives the investor an extra profit kick if prices rise (also a bigger loss if prices fall).
For instance, a 10 percent hike in prices boosts the gold's value to $11,000. For the investor who puts up only $2,000, the $1,000 increase represents a 50 percent gain.
But that's before fees. Dealer commissions tend to run from 2 to 4 percent. The bank charges on a one-year, $10,000 loan range from an effective annual rate of 11.88 percent (at the Bank of Delaware) to 15 percent (Valley State Bank). That includes storage, documents, and extra loan fees.
In other words, using the lowest rates available now, an investor with a one-year $10,000 loan would have to see gold prices rise about 14 percent - to $500 an ounce - before breaking even.
Remember, gold doesn't earn interest. If gold prices go sideways, the investor still has to pay the bank loan fees. If prices drop more than about 8 to 10 percent, the investor is subject to a margin call - a request for additional funds to cover the drop in the gold collateral's value.
In any case, ``Be wary of high-pressure sales calls or unsolicited attempts to force a quick decision,'' says Howard Segermark of the Industry Council for Tangible Assets.
This month, the trade group plans to publish a pamphlet of investment questions and guidelines. For copies write: The Consumer's Guide to Precious Metals, ITCA, 1701 Pennsylvania Ave., NW, Washington, DC 20006.
Also free from the National Futures Association: ``Before you say yes - 15 questions to turn off an investment swindler.'' For a copy write the association at 200 West Madison Street, Suite 1600, Chicago, IL 60606.
Bank rates also vary widely. For a one-year, $10,000 loan:
The Bank of Delaware charges 9.5 percent, plus a one-time fee of $200, plus a 0.5 percent annual storage fee. Effective annual rate in the first year is 11.88 percent (or $1,188) and 9.88 percent in the second year of the loan.
Safrabank of Encino, Calif., charges an effective annual rate of 12.75 percent (all storage and document fees included), or $1,275.
Valley State Bank, also in Encino, charges 12.5 percent plus an annual ``facility fee'' of $250, plus a fee of $60 to $90 per metal transaction. That is an effective annual rate of 15 percent ($1,500) plus transaction fee.