Counterparty Risk - Choosing the Right Gold Dealer

Year of the Snake silver coin and a Vienna Philharmonic silver coin with gift box, a modern presentation of an investment silver collection

By finding the right gold dealer you can minimise the counterparty risks that arise when purchasing gold or using precious metals storage services, so it is well worth paying close attention to your choice.

Beyond the price: who is a trustworthy gold dealer?

Average gold dealers operate on broadly similar margins. As in any market, suspiciously low prices should raise a red flag, because no margin is large enough to sustain a dealer's business indefinitely at below-market rates.

In Hungary in 2011-12, when people were practically queuing to buy investment gold, several scandals emerged. Certain dealers attracted unsuspecting victims with artificially cheap prices and then, once they had accumulated a large amount of client money, simply disappeared.

Many buyers risk 99% of their capital for a 1% saving, even though the average investment horizon for gold is 8-10 years. The best way to select a trustworthy gold dealer is through a personal visit, or by carefully evaluating the content and substantive references available on the dealer's website. It is worth taking the time to research thoroughly. If you have concerns about pricing, it is worth raising them with your dealer, because it may be possible to negotiate a better price than the one listed on the website, particularly for larger orders.

Where and from whom should you buy and store gold?

When purchasing investment gold, a relationship of trust often develops between the buyer and the dealer. Every client expects discretion, because the protection of personal data and security are of paramount importance. The price matters, of course, but other services such as advisory support, quality of customer care and the safe handling of valuables carried in person are equally important.

Storing gold requires an even greater level of trust between the precious metals dealer and the client than a straightforward purchase and sale transaction.

Is there deposit insurance or investor protection for physical gold investments?

Under current Hungarian and European Union regulations, physical gold is not classified as a capital market investment instrument. As a result, Hungarian precious metals dealers do not fall within the licensing and supervisory authority of the Magyar Nemzeti Bank (MNB, the Central Bank of Hungary). Because gold dealers are neither credit institutions nor financial organisations, client funds held with these companies are not protected by the Investor Protection Fund (BEVA), which covers securities investments, nor by the National Deposit Insurance Fund (OBA), which covers bank deposits.

Gold held in custody is typically insured by gold dealers through commercial insurers, or alternatively, the vault operator's insurance extends to stock stored there on behalf of the dealer. Proof of this insurance (evidence of insurance) is often available on the website of the dealer offering custodial storage.

Complaint handling: where can you turn if something goes wrong?

Before entering into a business relationship with a gold dealer, especially for a larger investment, it is advisable to verify that the company holds a valid activity permit issued by NEHITI (look for a four-digit number beginning with the prefix PR). This is particularly important when dealing with online traders. If a dealer does not hold a valid licence, it should be reported directly to NEHITI. The list of licensed gold and jewellery dealers can also be accessed from the same page.

Most precious metals dealers in Hungary are small organisations, so for minor complaints it is often best to contact the company's management directly by email. If an employee has made an error, the information may not have reached the management. Because complaints are rare under normal business operations, management should welcome the direct feedback from clients. Only a handful of larger jewellery traders or gold dealers (particularly those also operating pawn shops) have established dedicated complaints departments. In such cases, the complaint should be directed there.

If you do not receive a satisfactory response and believe your complaint is justified, you may turn to consumer protection, just as you would for any other merchant-related dispute. Typical grounds include misleading pricing, damaged product packaging where the dealer refuses to cooperate, or deceptive marketing and advertising.

If the matter goes beyond a standard commercial complaint and criminal activity is suspected, a formal police report should be filed at the police station with jurisdiction over the dealer's shop or registered office.

Among the activities listed in the "golden tricks" category, schemes described as "gold interest" and unlicensed pawn shop operations should be reported to the MNB.