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."

Related:
Gold and Fear

Gold and Fear

Gold

The price of gold has gone up so much over the recent years, it has reached historical heights (see Gold Index on MarketWatch).  Several weeks ago, my aged mother decided to pawn away all her gold jewellery.  She's getting of age and has decided that cash is more valuable to her than holding hard assets like gold jewellery.  It brings to mind the saying that "cash is king".  There appears to be some spectre of wisdom here.  I figure when the wider populance is starting to mess around with buying-selling gold, it has perhaps just about reached a peak.  Time to exit gold?

Fear & Predictions

For much of 2010, the market talk was about caution and expectations of China being a market to be as an investor. 

It would seem that firstly, the market continues to climb a wall of worry as oft repeated by Wong Sui Jau's blog.  If I had stayed out of the market, I would certainly have been worse off.  It has clearly paid off to continue to invest in times of continued fear.  The outlook continues to remain the same for the year ahead.  Into the third year since the market low, it is of course a time for caution.  I'm going into a infinite loop here somewhere in this argument?  Hmmmm....

Secondly, China has turned out to be an underachiever in 2010 for the investor.  Is it perhaps a healthy correction?  For sure, all the wonderful market predictions just prove that there is no clairvoyance out there.  Generally wrong.  Fascinatingly, in Fundsupermart's latest issue of their magazine (which is now half-yearly), it has noted that their Country predictions have turned out to be quite poor.  There seems to be no reward for timing and picking the market.  I predict a second year of poor results for the China market (in so far as investors are concerned).  Another infinite loop?

Accuracy

How accurate have my own prediction and stock picking turned out?  So far, poorly.  On at least two ocassions when I exited a position, it turned out that the price I sold at was the bottom, and subsequently recovered.  Looks like I can be buy-indicator.  Buy when I sell!

Analysing deeper, I realised this wasn't quite true.  On several other ocassions, I have been correct, exiting as the stock started going sideways, and for months since.  So what's going on here?  It's the traditional historical bias of recency and loss aversion affecting the mental state!  Selective information processing?

What has remained rewarding has been to stick to stocks that had a business I could reasonably understand, good history of dividend payout, a fairly stable business which did not whipsaw rapidly, and companies where insiders were also regularly buying and not cashing out (and/or company buy-back of shares).

I remain commited to a steady investing strategy.