Sunday August 5, 2012
Blinding glitter of gold
By JOYCE TEO
Seen traditionally as a ‘safe haven’ in times of economic uncertainty and as a hedge against inflation, gold is the type of precious metal that few can resist.
TYPICALLY bought in
its physical form through goldsmiths, jewellers or banks, gold denotes wealth
and status, and is a store of value and a way of passing wealth on to the next
generation.
Today, you can buy not
only gold bars and coins, but also gold certificates and gold-related funds.
Investment vehicles
such as gold buy-back schemes have also emerged of late. These purportedly pay
regular returns to consumers and/or offer to buy back gold at a premium to the
original sales price.
But you must first
know what you are putting your money into. On the Web, you may find entities
offering gold buy-back schemes telling you that gold is a scarce resource that
will continue to rise in price as global demand increases.
Gold quest: Today, you
can buy not only gold bars and coins, but also gold certificates and
gold-related funds. — Reuters
The gold price reached
US$1,595.50 (RM4,996) an ounce in the middle of last month, up from US$1,587
(RM4,969) a week earlier. But this is down from a peak of US$1,900 (RM5,950) in
late August last year, after having more than doubled in price from just over
US$700 (RM2,192) an ounce in November 2008.
Contrary to what many
may believe, gold may not continue to rise in price and act as a good hedge
against inflation.
History has also shown
that gold prices exhibit fairly high volatility.
Low risk, high returns?
In Singapore, gold
buy-back schemes sound extremely attractive as they appear to be low-risk
ventures that offer high returns.
Here’s how a typical
scheme works:
You buy physical gold
from an entity at a purported discount of say 1.5% to 2% and you may choose to
take the actual gold coins or bars home.
The entity then offers
to buy the gold back at the original sale price after a fixed period of time,
regardless of gold price fluctuations.
It would appear that
you get to earn a 1.5% to 2% return when you sell the gold back.
In reality,
the consumer’s purchase price is actually a premium to the prices offered by
goldsmiths or banks for the similar grade of gold. So, the consumer is in fact
paying more for the gold by participating in the buy-back scheme.
At one entity, the
purported discount is actually a substantial premium of 20% to 30% to the
market price.
Beware of the risks
What you have to note
about companies offering gold buy-back schemes is that they typically do not
tell you how they generate those returns.
This should raise red
flags.
If you don’t know how
the returns are generated, how can you assess what the risks are, how
sustainable the returns are and what can go wrong?
Remember that there
are no free lunches when it comes to investments.
Some of the entities
offering gold buy-back schemes in Singapore have been liquidated as they were
unable to sustain their unrealistic business model. The result is losses for the
consumers.
So, be cautious. Don’t
feel pressured to rush into such schemes without first thinking it through and
doing your homework and reading up on the viability of the schemes.
Remember that many of
these entities that offer gold “buy-back schemes” are not regulated by the
authorities which, in the case of Singapore, is the Monetary Authority of
Singapore (MAS).
Some of these entities
– for instance, Genneva and The Gold Label – are included in the MAS Investor
Alert List of unregulated persons who, based on information received by the
MAS, may have been wrongly perceived as being licensed by the authority.
The listing includes
those operating in Singapore as well as those based overseas.
You can access the
list from the MAS website (www.mas.gov.sg) or the MoneySENSE website (www.moneysense.gov.sg).
While it is useful to
check if the entity you want to deal with is on the Investor Alert List, do
note that the list is not exhaustive and that it is updated only from time to
time.
So, even if an entity
is not on the list, it does not mean that it is regulated by the MAS.
Ask before you dive in
- How is the entity going to pay you?
- How are the returns generated?
If the entity tells
you that this is a trade secret or that it is confidential information, how can
you assess the risks? And how will you know if the returns are sustainable?
- What are the terms and conditions?
- If you have a complaint, is there anyone you can approach with it?
- If you are told that you are buying gold at a discount, do you know that for sure?
You can check how the
price compares with the price of gold bars at, say, goldsmith shops.
- If you are told that you can sell your gold bar in the open market and potentially earn a return, have you checked where you can do that and at what price?
You can simply visit
some goldsmith shops to find out.
- What happens if the entity folds?
Some schemes may hand
over the physical gold bar to the consumers while others may hold the gold bar
in custody for consumers. If it is the latter, you may be left empty-handed in
the event that the entity folds.
Your entire capital
may be lost, particularly if the entity has not earmarked the gold for the
consumer, but has instead recycled it for multiple consumers.
Even in the case where
you have custody of the gold bar, there is still a lot to lose if you paid an
inflated price for the gold. You would incur a loss if you were to sell it in
the open market.
Other ways to buy gold
If you are keen to
invest in gold, there are alternatives to gold buy-back schemes.
There are
funds investing in gold-related securities and futures. You should always do
your homework before investing in these products.
First, read the
product documents to understand the product’s features and risks. For instance,
if you are looking at a fund, ask for the prospectus and the Product Highlights
Sheet (PHS). The PHS should provide you with a good snapshot of the product.
You can also ask the
person offering the product to you to highlight or explain the key features or
risks.
Find out what the product
invests in, what factors can cause you to incur a loss and also, what can
happen in the worst-case scenario.
If you have queries,
it is prudent to ask for the clarifications in writing. This way, you can
review the information carefully and consider if the product is suitable for
you. Remember to keep a copy for your reference.
If you find that you
do not have a good understanding of a product or are not comfortable with the
risks, look for something else that you are more comfortable with.
If you have invested
in a fund and feel like it is a bad decision, you can change your mind within
seven days. This cooling-off period means that you will not incur any
administrative penalty for cancelling your purchase but you may suffer a loss
if the fund has fallen in market value after you bought it.
If the market value of
the fund has risen, you will get a full refund of what you paid for the fund,
but you will not be entitled to the gain. In either case, the sales charge will
be refunded to you.
Do note that this
cooling-off period may not be available for certain funds such as
exchange-traded funds which are bought and sold on an exchange.
— The Sunday
Times/Asia News Network
Comments
Post a Comment