Is Gold Trading an Investment Risk?
Ever since the Genneva scandal, gold trading has been exposed as a major source of scams in Singapore and Malaysia.
Published on 30 June 2015
One interesting aspect of gold trading scams is their target demographic – they are not aimed at low income group (a more common victim of such scams) but at cash rich investors.
Here’s what you need to know about them:
Gold trading is essentially an investment scheme, which involves the purchase and resale of (often physical) gold.
The idea behind the scheme is to purchase gold bars now, and re-sell them to the gold trader at a higher price later. There are many variations on this scheme, which may include the trader paying interest for your gold, selling your gold for you and splitting the profits, etc. but the general idea is unchanged.
Gold trading is not new, and has some history as a legitimate business. Even today, there are some gold traders run as honest businesses – but these have been tainted by unethical gold traders, and the industry is known for causing court battles and consumer association complaints.
Do note that the word “investment” is seldom used by gold trading companies – this is because financial products described as investments are subject to strict regulation by the Monetary Authority of Singapore (MAS). Most investment products can only be sold by licensed professionals / organisations. So by declining to call their product an investment, some gold traders are able to evade the requirements.
Gold traders will invite you to a seminar or a personal “business chat”, and there is usually no charge for this. They may disguise the session as a free “life empowerment” course, or an annual investors review – whatever works to bring you down, where you can be cornered by their sales pitch.
If you are married, you will usually be asked to come down with your spouse (this is to prevent you from saying you need to consult with your spouse later, thus making it easier to pressure you into buying).
Most gold trading scams use the same formula in their sales pitch:
The exact method on your returns will vary – different companies offer different explanations as to how you get your money back.
At its core, the proposal made by most gold traders is illogical.
If they are confident that the price of gold is going to rise, why would they sell it to you now, and buy it back when the price rises? Why wouldn’t they just hold on to it, and sell it for themselves at a tidy profit?
There are a number of answers to this conundrum:
This is the most common method of scamming you. The gold is sold to you, and you in fact have possession of it – they will even wrap or decorate it quite nicely, and put it in your hands.
However, they will sell you the gold at 20 – 30% higher than the current market value. They will promise, however, to buy back the gold at the full amount at a given time.
This will be true for the first two or three rounds of investors – the gold traders hope these people will rope in friends, fools, and relatives, or make an even bigger investment the next time around (a common reaction when an investment works the first time).
But when the total number of buyers hits a certain amount, the gold traders will close the company. They will then flee, or set up under a different name and avoid the obligations of the previous firm.
It’s true that, if this happens, you will still have the physical gold. However, your money may be tied up in it for years. Remember: you will have to wait for the market value of gold to rise by 20 – 30% just to break even.
On top of that, there are difficulties and transaction costs involved in selling physical gold. Unlike stocks, you cannot sell your gold bars with a single phone call. Even worse, you may have to bear the cost of insuring them.
In this instance the gold trader sells you the gold, and then finds a buyer for that gold on your behalf. When a suitable buyer is found (or should we say if a suitable buyer is found, as there’s no guarantee), they then will share the profits of the sale with you.
This is a transfer of risk on the gold trader’s part. They are uncertain regarding the direction of gold prices, or the possibility of finding a buyer – and his is where you come in.
If the gold falls in value or they cannot find a buyer, it becomes your problem and not theirs – you already gave them the money, and you’re the one stuck with the overpriced gold.
If the gold value rises or they find a buyer, they will sell the gold and take a lion’s share of the profit, leaving you with a pittance in exchange for the investment risk you took. In many cases, you will also have no way to check who they sold the gold to, and for how much – they will insist the deal is confidential.
Whatever the case, your wallet is being used to mitigate their company’s potential losses.
In this instance, you will be asked to buy a gold fund, gold futures, or some other form of “paper gold”. Later, you will find that the intangible assets purchased don’t exist, and their “price movements” were empty simulations on a computer screen.
Alternatively, some gold traders offer you “safe storage” for your gold, which you may even be forced to pay for. You will be shown the gold whenever you demand an inspection – but you will be looking at the same gold they already sold to 10 other people, all of whom think they own it.
These scam artists often have a few gold bars, which they “sell” to as many people as they can before running off with the money.
But what about the legitimate gold traders?
Some honest gold traders are still out there, struggling to keep going. Gold is in fact a good asset for diversification, and a hedge against inflation (if you like us on Facebook, we’ll be glad to update you on that)
It cannot be stressed enough however, that while these legitimate traders exist, you should never attempt to identify one without help.
Bear in mind that gold trading is loosely regulated, and there are other gold investments that may be much more secure. At the very least, check the MAS website of blacklisted companies before buying.
If you had the aid of a skilled wealth manager, she may be able to vet the companies and conduct the right background checks (we can put you in touch with one for free). Even for wealth managers however, gold trading schemes are a hair raising proposition, and you will likely be recommended another product.