CNA Insider discusses the safe and unsafe ways to invest in gold with three industry experts.
When times are tough, people may look to gold as a safe haven investment. But as with all investors, there is an element of risk. In the case of gold, experts say investors should only buy from authorised bank, gold dealer or retailer. It is also important to have safeguards in place to weed out fakes and check on authenticity.
Victor Foo, CEO of Singapore Precious Metals Exchange: “We can use a very sensitive weighing machines that provides the density.
Second, we use a handheld XRF, which basically scans the surface of a bar. And it shows basically the breakdown of different bars. Third is the ultrasound machine where it scans through the bar, where should there be any adulteration, then it will detect there is some impurities in the bar.”
But even if it is the real thing gold investors could still become victims of scammers. Over the past decade these have included gold buy-back schemes from companies like Geneva Gold, The Gold Guarantee, and Swiss International. So how can investors spot these scams?
Firstly, if a company promises a high monthly or yearly interest or dividend on gold, it should ring alarm bells because gold doesn’t pay interest.
Foo: “All these companies which were selling in the way of giving return had huge markups ranging from 15 to even 25% markup over the prevailing gold prices. And they use those mark ups to pay those returns to customers. So for every new customer that comes in, they basically use a markup to pay the next guy.”
While markets are a red flag discounts should also be viewed with suspicion some schemes lured investors with discounts from the contractors due, they can sell the go back to the company at the full 100% price .
Wong Kon How, Managing Director of Weipedia: “For example another gold prices at $1,950 they say that you can fetch a sit at a maybe 5% discount right now. In most markets, we usually pay a premium over the spot price.”
And then there are schemes that give a payout and promised to buy back the gold at the original price regardless of how gold prices have fluctuated since then. In other words investors get back their principle amount invested, plus earn returns at the same time.
Wong: For example now, if I buy at US$2,000. Say in the coming month or coming year, if the gold plunged to about US$1,600, so there’s a loss of US$400 . So if they’re going to buy back at US$2,000, then my question is that then who is going to bear the losses?”
Scammers have evolved and become even more creative.
Simon Ng, CEO of RHB Asset Management: “It required investors who had purchased the gold bars from the seller to deposit their gold bars with the company for inspection, and the companies will in turn resell the gold as being surrendered by the existing investors to other investors, which end up to have more than one investors laying their hands on the gold bars.”
Digitization has opened up more loopholes for exploitation.
Foo: “More recently, you see a lot of digital currencies claiming to be backed by gold. If a company says that it is backed by gold, you should be able to identify where the gold is from, number 1. Two, what is the pricing? Should there be a high premium or high bid and offer spread, these are indicators to show you that it also may be a derivative paper contract to provide the offering first before they even transfer the derivative into a physical proposition. Should there be a physical backing, and in most of the digital backed gold are fictionalised.”
But it isn’t just gold the precious metal that’s been making headlines. The price spikes have also put the shares of gold mining companies in the spotlight.
Ng: “The growth and return in the stock depend on the expected future earnings of these for mining companies, not just purely on the value of gold. Practice such as effective management, production costs, reserves, mine exploration and projected development that money as well as hedging activities are also factors to consider.”
But market watchers say these shares can turnout to be very risky investments.
Foo: “The mining shares are based on a future mining production, which is a question mark. They probably have done their test in terms of finding whatever reserves there is underground. Should whatever projection that they project do not come to pass, you may lose a lot of money.”
Investors are, however, drawing comfort from Warren Buffett whose Berkshire Hathaway bought a stake worth about US$564 Million in gold and copper miner, Barrick Gold. Mr Buffett has been a long time critic of gold, so this change in investment direction is sending strong signals to the market.
Ng: “The case of gold mining stocks as well as gold equities as gotten stronger recently with the improving balance sheets, the cost of operating properly under control, the free cash flow profiles of this companies are also looking stronger. And the return on the invested capital of this for mining companies are also relatively stronger, as well as the quality management teams.”
Source: CNA Insider, Money Mind, Gold Strategy, September 25, 2020