It’s obvious the writers at BT did not get the memo on gold buy-back investment schemes. But, in case anyone out there actually wants to know HOW gold buy-back schemes work, the following articles spell out the equation. And if you’re still too lazy to read them, here’s the summary:
1. Company X buys gold at Market Price
2. Company X sells gold to investors at Market Price + roughly 25% markup (let’s call this M+25), but tells you that you’re getting 1.5% “discount” off the M+25
3. Company X promises to buy back your gold from at the same M+25 price in a month’s time, but allows you to keep your 1.5% discount
4. Behind the scenes, Company X hopes your gold price rises at least 1.5%, nett of commissions and holding costs, in order for them to make money. Meanwhile, because it bought at M, and sold to you at M+25, directors will make advance booking for Ferraris before you can.
So, can you make money from this? Yes, IF the market continues to go up. If market comes down, and every gold investor asks for the principle M+25 back, Company X will be faced with a simple liquidity crunch. So timing is everything, people. But then, it’s the same when you’re juggling grenades too. Hopefully you’re the FIRST juggler.
Business Times – 09 Apr 2012
New gold player emerges with ‘buyback offer’
But customers may be buying overpriced gold
By KENNETH LIM
(SINGAPORE) Another gold trading company marketing an ‘offer to buy back’ has emerged even as others have folded or come under regulatory scrutiny.
The Gold Guarantee, an outfit headquartered in Boat Quay, claims that it will buy back gold at a premium to the original sale price, becoming the latest to offer such a product.
This newest entrant comes in the wake of Genneva Pte Ltd, whose Malaysian arm is under investigation, and The Gold Label Pte Ltd, which has since shut down. Those two older companies have been placed on the Monetary Authority of Singapore’s Investor Alert List, a cautionary document of parties whose activities are not regulated by MAS.
This, or some variation, is what such companies typically offer: They will sell investment-grade gold to you today and give you the option to sell it back to them at a premium after a fixed period of time.
If gold prices have gone up significantly, you can potentially sell on the open market instead and make an even better return.
The typical marketing language can lead customers into thinking they are getting a cheap, low-risk deal. In fact, customers may be buying overpriced gold and a promise whose real strength is not known.
The Gold Guarantee’s brochure cites an example where a customer can buy ‘gold bullion at market price ($80/gram) with 1.7 per cent discount’, suggesting that it is selling the gold at a discount to current ‘market’ prices.
In reality, ‘market’ price may turn out to be a premium.
The Gold Guarantee founder Lee Song Teck initially said that the company sets its market price off the Singapore Jewellers Association’s recommended gold prices. But a check with the trade association revealed that the SJA has not been recommending prices for quite a while to comply with competition laws.
Confronted with this, Mr Lee clarified that his prices were benchmarked on ‘goldsmith prices’ that are gathered from sources on the ground.
But goldsmith prices come with quite a hefty premium, which means that The Gold Guarantee may be selling investment-grade gold at a more expensive price than a straight seller, like a bank, for example.
Buying overpriced gold could still make sense for the customer who can get a minimum positive return from the buyback option.
But what is the real value of that ‘offer to buy back’? The promise to buy back the gold is only as good as the promisor’s credit.
The quality of The Gold Guarantee’s credit is anyone’s guess.
Mr Lee said The Gold Guarantee maintains some capital to meet its obligations, but did not say how much capital the company holds. The company was set up with just $1 million in paid up capital, according to filings with the Accounting and Corporate Regulatory Authority in Singapore.
How the business can withstand the test of mass buyback demands is another question. Mr Lee said The Gold Guarantee does not hedge its exposures using ‘fancy financial stuff’, sticking to physical gold and a ‘buy low, sell high’ strategy. He told BT that if the price of gold drops, he will buy more gold and that will drive down the average cost of his stocks.
But such a strategy could backfire if prices go down for a sustained period, because The Gold Guarantee will face both a depreciating inventory and a wave of buyback demands.
These gold companies are similar in more than just business model. The Gold Guarantee’s website lists four core corporate principles – honesty, loyalty, trust and integrity – that are described almost word-for-word as on Genneva’s website.
Mr Lee said The Gold Guarantee and Genneva are unrelated, and any similarity is coincidental.
Genneva director Leow Wee Khong declined to comment, citing the regulatory spotlight that has been cast on the company.
The attraction of the two selling points – gold at a discount and an offer to buy back – has helped The Gold Guarantee, which Mr Lee said targets ‘middle class’ customers, to grow extremely fast.
Mr Lee said that since it started in July and August 2011, The Gold Guarantee has sold about 2 tonnes of gold to about 500 customers, and has about 35 in-house staff and about 300 ‘sales consultants’.
The company already has a marketing presence in Malaysia, and Mr Lee, a self-proclaimed savvy investor, even shared his hopes to expand regionally, to Japan, Hong Kong and Taiwan.
It is not clear who regulates such companies, which usually say that they only need a licence from the police to deal in second-hand gold. Mr Lee took pains to stress that he was not selling an investment product. If he was, it would put him under the purview of the MAS.
One gold industry veteran said such businesses have found a foothold because of the rising price of gold over the past decade and the lack of easy access in Singapore to investment-grade gold. All three companies began after 2008. ‘I hear about this all the time from my friends,’ the veteran said. ‘I tell them, you go and do the calculations and see if it still makes sense.’
Financial planner Eddy Cheong, head of financial planning at Providend, said investors have to ask a few questions when faced with a product that seems incredibly lucrative. ‘How are they going to pay you?’ he asked. ‘What are the terms and conditions? Are there any guarantees? If there’s a complaint, is there a channel I can go through?’
Mr Cheong added that people should also not feel pressured to rush into such products without thinking it through. ‘You don’t have to rush into it,’ he said. ‘If it’s a good product it will stand the test of time and it will still be there later.’