Thursday, October 18, 2012

What is gold buy-back scheme?

What is gold buy-back scheme? How gold buy-back schemes work? In this scheme, the gold buy-back company buys gold at market price but then sell it to investors 25-30% premium. So let's say they buy a piece of gold for $1,000 and sell it to an investor for $1,300. The company promises the investor that it will buy the same gold back from at the same $1,300 price in a month. The investor is allowed to keep 1.5-2.5% discount. So according to the gold buy back company if you do this regularly every month you can have 18% - 20% per year which is of course too good (to be true).

Because the investors pay 25-30% premium on the gold they buy, the company makes a lot of money. And as long as there are more entrance to the scheme and gold prices goes up the party will go on. So although the investors can make a lot of money as long as the scheme runs, when the party comes to an end, he/she may well lose 25-30% premium paid for gold.

So this is the reason Singapore's MoneySENSE, the national financial education program, issued a warning late last month warning the investors that gold buy-back schemes are highly risky.  The problem is the companies offering these schemes usually do not tell investors how the returns are generated. Many of the companies in gold buy-back scheme” business are not regulated by the Monetary Authority of Singapore
(MAS). Worse some of them - like Genneva and The Gold Label – are included in the MAS Investor Alert List. And on October 10th Malaysian Central Bank, Bank Negara, issued a press statement on the joint raids by enforcement agencies on the gold buy-back schemes stating that:
“…it has been discovered that these companies are operating schemes that are believed to be not sustainable to provide the promised high monthly returns, nor would they be able to provide the buy back guarantee of gold.  Such schemes are not sustainable because the returns promised are not funded through gold trading, but from the monies invested into such schemes.  The investigations have also revealed that the amount of assets and monies held by these companies do not commensurate with the amount collected from their investors. “[1]
This is how party ends.

What Bank Negara describes is not siprisingly a ponzi scheme. Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.[2] Enter Greater fool theory:
"Forex trader C.Y. Wong bought $250,000 worth of gold from Genneva, the firm that was raided by authorities on Monday. But unlike others who bought from the gold trading firm, he is not too worried. He told The New Paper that he is in a "good position" as he had already recouped his investment made two years ago. Said Mr Wong: "I've collected two years' of discount and generally after one year, you're in a good position."[3]
There is now a Genneva Singapore Complain Group forum which is founded by these late and disgruntled investors on the consistent delays of promised payments. Geneva now issued a statement which claims that sometime back the directors of the company discovered financial improprieties that led to delay in the payment of discounts and commissions of buy-back guarantees. The statement says the directors have since lodged the necessary police reports and put into place fresh management staff....

[1] - Bank Negara Probe Indicates Gold Buy-Back Schemes Not Sustainable
[2] - Ponzi scheme
[3] - Genneva gold investors claim payments delayed

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