02 February 2015

The Allure of Gold - Treachery of the Glitter

Gold is such an alluring product. It somehow carries this magical feeling of value. Perhaps it has to do with the Chinese and Indian cultures of collecting gold products as items of value, passing on from generation to generation.

Unfortunately in recent years, gold scams have been repeated, case after case. How does it work? Here's the general idea ...

The Scam

Company sets up shop in some flashy area, coupled with gold plated signages. It looks "rich", creates the illusion of grandness and brand. The Company sells the idea of VERY HIGH interest returns from buying gold, padded with the offer to buy back after a lock-in period at a lower percentage of the cost. Let's say 80%. So it comes across as principal guaranteed right? And coupled with the interests earned each year, it would seem like the full principal sum would be guaranteed. The holding period seems short. Perhaps three years. Would seem like the risk is gone after the three years? Certainly looks a lot shorter than waiting 20-30 years to see one's CPF money? So it starts to look damn attractive.

Then, couple this with a year or two of real track record - i.e. the pay out feels real. Now you build a base of investors who have become your spokesmen. They are then enticed into introducing their friends, people in their circle of trust. Unknowingly, the first generation of investors have become their sales agents. The pyramid now snowballs.

Is this whole business even real? This is actually viable for the company when the price of gold is on a continuous uptrend. Consider the early part of 2000s. That's how the price of gold looked like. The company is able to pay out the interest from the appreciation of the value of gold itself. Actually, the investor might have been better off buying a Gold Exchange Trade Fund (ETF) directly from the stock market and get the same outcome!

Post 2010, what has happened? The price of gold has been on a decline. Consequently, the company selling the scheme wouldn't be able to provide the high interest payout anymore. Or they could do so but suffer horrendous losses with no certainty of the trend moving forward.

So what do they do? They run! The investor is left holding the can, losing whatever cash they had invested. Capital guaranteed? Alas, not when the seller has run away with all your money. These schemes are not regulated by the Monetary Authority of Singapore (MAS). Best of luck!

In a country seen as upright (some say uptight) and trustworthy, it just seems unthinkable to the average man on the street that such large scale cheating can happen here in Singapore. There is too much in the psyche that the government is taking care of everything.

Then there is the problem of greed, and that absence of understanding on what realistic investment returns can be. When the risk-free rate of our CPF-SA is at 4% per annum, is it realistic to expect any real investment that can give out 4% per month!? That's 48% per year. Come on! If there is such easy money to be made, nobody needs to work anymore. The money tree must have become a reality. Ah, Utopia.

A Consequence

Most unfortunately, I came across an old friend who got himself caught up in this shady business. He was apparently the seller. I do believe he was quite an innocent partner thinking that he was offering a legitimate investment business. His partner ran away. He didn't. So he gets all the shtick. He got sued by a whole bunch of investors. You can imagine how his life has gone downhill. From living in a decent condo to driving a taxi trying to make ends meet. I hope he recovers from all this.

Morale of the Story

To repeat the cheesy line that has been so often said, "When it's too good to be true, it's most certainly too good to be true."

Gold and Fear


ladykiller said...

Back in 2007 when oil prices where sky rocketing to 147/bbl plenty of oil investment schemes were created too. People will always have to learn the hard way that reward and risk are proportional. Sadly!

Lizardo said...

Oil, gold, land, rental properties. Just too many scams whenever opportunity presents. Wonder what's the next scheme?