The real McCoy or just fool's gold?

[kazukirai]

I wonder, do chinese newspapers have articles on financial literacy or more tabloid type news? Newspapers are still the primary mode of information dissemination after all.

Somehow, it doesn't seem like the editorial direction to advocate more financial literacy. Not the objective (monetary, political or otherwise) of the newspaper I think. I guess the ones not doing their job are the financial authorities. Or rather they believe, like most western doctors, that you need to have the disease before I can give you a cure. Obviously, prevention is either too much work or a fairytale.

But we do see a lot of reporting on the matter once CAD steps in.

[MrValue]

There is actually a little more to their scheme.

Within a certain window period around 1 month from the date of "investm", the investor must bring the gold back to the firm and sell the gold Back to them to get back their purchased price. Then investor can choose to buy back the same gold at the prevailing list price with 2% rebate, effectively renewing the contract.

Using d.o.g.'s Example,
A) say gold px remain at 1000 at T+1 month n list px remain at $1200

investor sell to firm at $1200 and purchase back at 2% rebate = $1176, thereby receiving $24 or effectively ard 2% interest.

b) say gold px shoots up to $1100 at T+1 month n list px in turn move to $1320

investor sell to firm at $1200 and purchase back at 2% rebate Of list px= $1294, so investor need to top up $94 if he renew Ctt and get back the same gold bar!
He can of course choose to Sell without purchasing back. Then the firm pays $1200 for gold worth only $1100, so firm looses only $100 in this transaction when it has made $176 from this investor at time T.

Investor could even decide that gold is worth keeping after all, and decide not to sell back even at the higher contracted px. Then firm gain the markup less rebate paid to date.

C) say gold px drops to $900 at T+1 month n list px in turn move to $1080

investor sell to firm at $1200 and purchase back at 2% rebate Of list px= $1058, so investor gets $142 if he renew Ctt and get back the same gold bar!
He can of course choose to Sell without purchasing back. Then the firm pays $1200 for gold worth only $900 so it looses a great amt.

However, at lower gold px, more people cld be interested in taking part in the scheme so the gold "investm" firm could still meet its cash flow requirem.

The bottom line is: As gold price has been trending upwards in the past few years, these gold "investm" firms have florished, as they have an underlying long bet on gold.
Their parties will end if there is a drastic plunge in gold price or if gold price remains stagnant for a long enough period.

For reference purposes, let's say the price of gold is $1,000.

We know the firms sell the gold at a markup over the market price, 15-25%. Let's just say 20% for simplicity's sake.

So now we follow the money:

1. You buy gold for $1,200 (20% premium).
2. The firm buys gold on the open market for $1,000 and delivers it to you.
3. Each month thereafter the firm pays you 2% on your $1,200 "investment", for a simple return of 24% per year.

So the question to ask is:

How does the firm generate the money to give you 24% on your original cost?

1. We know the firm only has $200 to work with since $1,000 was used to procure the gold.
2. The 2% monthly return is on the $1,200, so it amounts to $24/month.
3. This $24 is actually 12% of the $200 residual left with the company.
4. The company must be performing some sort of activity that can generate in excess of 12% per month.

I do not know of any legitimate business activity that can sustain a return on capital of 12% per month. Without compounding, this would already amount to a return of 144% per year. Money laundering, pimping, drug dealing, weapons smuggling, loansharking or human trafficking might do it. But these are not legal activities, at least not in Singapore. Even credit card balances attract interest at "only" 2% per month.

Occam's Razor states that the simplest answer is usually the correct one.

I posit that the simplest (and correct) answer to how the firms make money is that Genneva, The Gold Label and all other firms with similar investment/cashback arrangements are in fact Ponzi-type schemes where new investors' money is used to pay off old investors in order to generate the appearance of returns.

Because the original $200 residual is exhausted within 9 months, each old customer must be matched with a new customer within this time. But now the new customer's $200 residual is paying both him and the old customer, so it runs out in under 5 months. 2 new customers must be found, then 4, 8, 16 etc i.e. the scheme must double in size every 5 months in order to keep going. Obviously a scheme that requires this sort of growth rate to survive is highly likely to collapse within a few years. I would be very surprised if any of these schemes are still around in 5 years.

Violation of Banking Act:

I also checked the Banking Act, where it is made quite clear in Section 4A that unless appropriately licensed, no person can accept deposits in Singapore.

Since both Genneva and The Gold Label purport to pay "rebates" that function identically to interest, they are in effect taking deposits that amount to the residual $200 and paying interest on it i.e. they appear to be functioning as illegal banks.

[gutman]

A good quote that I like applies in this case:

“I’m sure you’ve heard the expression, ‘If something sounds too good to be true, it probably is.’ Well, in the investment world, I say, ‘If something sounds too good to be true, it definitely is.’”
[1997 Washington Times 3 June B7]

[sportsinvestment]

Seems to be numerous gold investment scams rearing their heads. And a great many people willing to "invest" as well.

Certainly these returns are beyond what one would expect from investing in gold in a normal fashion.