Wednesday, September 15, 2010

Risky to invest in gold bars

An investor found that it was risky to invest in a gold bar under this investment scheme and decided to skip the investment.


silverybay said...

It gives a false sense of security to the investor thinking that he/she has the gold bar in hand and even if the company defaults, the investor still has possesion of the gold bar.

Most of them aren't aware that they are paying way above mkt price for a bullion bar because they use the jewellery shop's retail price as benchmark. Most did not undertsand that price of gold quoted by jewellers include mark up for workmanship.

Hence, when told that the price of gold that they are paying is in line with mkt rate and verifiable with the price quoted by the retail jewellers, the investors is convince.

The same bar can be purchase from UOB Bullion counter for more tan 20% lesser.

In addition, investors should query how the company is able to pay that 6% interest plus rebate. What did they do to generate this kind of return to pay off investors?

They will most likely tell you its proprietary trade secret and as long as you get have possesion of the gold bar and get your payout, that's all that matters.

If its that lucrative, they should approach the hedge funds and even GIC for a few hundred million. Why deal with so many small retail investors when they can raise one big lump sum from institution?

Wealth Journey said...

This gold bar scheme is quite similar to some overseas properties advertisement offering guaranteed rental returns of 8% per annum for 3 years. The selling price have most likely factored in the 8% rental guaranteed by the seller.

It's good if people who invest can think logically and do some homework like what you cited in the goldbar case.

Jamesneo said...

To silverbay, it is actually possible to generate high returns for gold over a longer period like one year as the returns over the past 5 years for gold is 120.20%. However,i do not see the benefit of buying from this dealer instead of buying it yourself from UOB like what you said. Firstly buying at such a large premium over the spot price is clearly not a wise choice. As investment returns are not certain, buying from such dealers with be risky if the dealers do not have the cash flow for periods when gold is making a loss or undergoing corrections. Moreover, the gains in gold is seasonal with periods like sept, nov to jan the period with the greatest appreciation partly due to the Indian demand. Hence, when you buy the gold is also important if you are trying to for capital appreciation but less so if you are buying for safety.

silverybay said...

@Jamesneo, I agree that gold can provide good returns over medium to long termas attest its performance over past decade. I had purchase gold back in the late 90's when its still in its slumber at US$200+/ounce.

However, there's a carrying cost to holding physical gold and most custodian banks will charge you a fee for gold storage. Likewise when yoy trade spot gold or loco london gold, you pay interest everyday if you bought gold and you receive interest income if you are short seller of gold.

Thus, when someone pays you interest to hold physical gold, its a big red flag. Its like you paying the bank interest to deposit YOUR money, it just dont make sense at all.

hyom said...

Gold like all other commodities do not yield an income stream as an asset class. In fact, like silverybay has pointed out, there is a storage cost for gold. In other words, you have to pay for holding gold (or any commodity) unlike stocks and bonds where you get paid.

It is strange to have an investment that pays interest using gold as the underlying asset. It is highly fishy when you have an investment instrument having returns characteristics which is different from the underlying asset.

Andrew Tan said...

Such investments are popular among the older generation. I have colleagues parents who join such investment.

I dun really recommend such investment since it is just too good to be true on paper.

I done a similar post on a particular company dealing with such investment and I believe it to be the same company as well.

My blog is for this is

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