Rogue investment should be bard

The expensively produced brochure received by Roger, a Moneywise reader from Doncaster, launched its sales pitch with a reassuring quote from William Shakespeare: “I advise you, as long as the capitalist system lasts, vote for gold.”

The quote is from The Merchant of Venice, which may not offer the best example of a happy and well-regulated financial services industry. But then neither does the brochure, which comes from an investment company in the Capital Asset Group.

The group has traded over $450 million (about £225 million) in the precious and industrial metals markets and boasts that it is “one of the global leaders in the offering of physical commodities to private investors” working with “erudite independent financial advisors”. It recommends that individual investors place up to 15% of their savings in commodities.

Capital Asset Group has offices in the US, Spain and the United Arab Emirates. In the UK, it has offices in Chelmsford, Nottingham and Edinburgh, as well as at Canary Wharf in London, a short walk from the headquarters of the Financial Services Authority.

It all sounds very reassuring – except that the group is not authorised by the FSA to offer investments, nor is its US headquarters licensed by watchdogs there. Yet oddly, nobody is breaking the law.

You see, when the glossy brochure is followed up by a telephone call from a Capital Asset Group salesman, although he will sound like a commodities broker and speak knowledgeably about trends in the price of gold, silver and copper, legally he is just a scrap metal dealer. While genuine commodities brokers offer a piece of paper that lets you bet on a price movement within a fixed period, the Capital Asset Group actually sells you a lump of metal. So, under FSA rules, its product is no more of an investment than a house, car or antique.

In practice, of course, all you get is a piece of paper that says your metal is stored in a warehouse. But in theory you could drive up, produce your receipt, demand your metal and drive off with it.

While Capital Asset Group is doing nothing unlawful, its clients should realise that, as the company is not authorised by the FSA, they will not be able to complain to the Financial Ombudsman if something goes wrong, nor will they be able to make a claim with the official compensation scheme.

And there is a further twist in this tale that could load the dice against the investor. The group does not just sell pieces of metal. It also offers loans so that you can invest more. For example, put down £2,500 for an industrial metal such as zinc or copper, and Capital Asset Group will sell you metal worth £10,000.

The idea is that this leverage increases your profits by letting you invest money you don’t have. But the downside is that it can also increase your losses, and the risk here is greater because you are gambling that metal prices will rise faster than the interest charges that mount up as soon as you agree to the loan.

Of course, you can pour money in to cover any fall in metal prices, but you might be throwing good money after bad. The winner, whatever happens, will be Capital Asset Group, and typically the investor will come a poor second.

Tony Hetherington is Consumer Champion of the Year 2006

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