Gold makes an ideal investment product because of several key features: its liquidity, fungibility and ability to hold on to value as well as being a natural hedge against inflation. Moreover, the value of gold appeals to the sentimentality of most investors and conveys a sense of security. Unsurprisingly, there are a substantial number of investment products and schemes that use gold as their base to earn returns and yields for investors.
Unfortunately, the precious metal attracts more than its fair share of scams, which have tainted the value of gold investing. In recent years, Malaysia and Singapore have had to deal with a number of gold-related controversies. Companies such as Genneva Gold, Suisse International and Valiant Capital are but three examples of gold investing schemes that have allegedly defrauded investors by promising overly attractive returns on their investments.
In the case of Suisse International, the company promised customers a monthly payment of S$1,000 for every kilogramme of gold (valued at S$54,000) purchased, yielding an annual return on investment of over 20%. After a few months, the payments stopped and the company’s founders disappeared, leaving more than 250 investors nursing a S$35 million loss.
The Genneva Gold scheme was a more elaborate variant of the simple buy-back scheme where investors were promised an annualised return of 21% to 30% on their gold. The scheme came with an explicit guarantee that investors could sell the gold back to Genneva at the same price it was purchased. Not too much can be said about this case as it is still making its way through the Malaysian courts. But suffice it to say, investors did not receive the returns they were expecting.
However, it would be unfortunate to consider all gold savings or investment schemes as scams as the precious metal has important attributes that make it an ideal investment product. Canny investors should look for the following features and safeguards in the business:
- Gold bars and coins offered by the savings or investment company should be produced at reputable refineries, such as PAMP or Perth Mint, which are recognised by major bullion market organisations such as the London Bullion Market Association (LBMA). Another safeguard is to ensure that the gold bars and coins are issued by a central bank, for example, Bank Negara Malaysia’s Kijang Emas.
- The quoted buying and selling prices of gold should be comparable to the bullion market’s spot price. A good resource is the World Gold Council’s (WGC) website — www.gold.org — which provides weekly real-time prices. The WGC is the market development organisation for the gold industry and provides resources to help investors make smart decisions.
- The company should publish a daily list of its gold bar holdings from its independent vault agents, which can provide details of the individual bars held on its behalf as well as the bars’ assayed gold content. The company should also publish a daily custody list of gold owned by each of its customers and make the list available to investors for review. Investors can review the list to determine their gold holdings and the total amount of gold held for all customers as well as cross-check the custody list against the list provided by vault agents. This exercise provides assurance that the company is in possession of the gold in the vault. In fact, the amount of gold recorded in the vault agent’s bar list should be greater than the amount of gold on the custody list as prudently managed companies will always keep additional gold in the vault.
- Larger companies should engage a specialist audit firm such as Bureau Veritas Inspectorate to conduct annual audits of their gold holdings. The audit will:
- Reconcile the gold inventory records of the company with the records of the vault agent;
- Conduct a test on a random sample of individual gold bars against the records of the vault agent for identification numbers, refiner codes and purity of the bars; and
- Conduct a test on a random sample of gold bars to ensure that the bars are 100% genuine.
- The gold held by the vault agent should be in allocated gold accounts (as opposed to unallocated gold accounts). This obliges the agent to hold the customers’ gold as its outright property under a custodial or safe-keeping contract. Under the law, a liquidator must return the formal property (the gold) to the customer even if the company or vault agent were to fail. Allocating the gold also means that the company cannot use customers’ gold for any purpose without their express permission.
- The company should provide a fact sheet on the savings scheme that clearly sets out the product features, benefits, associated costs and risks. This is important as it enables the customer to make an informed decision about the suitability of the product.
In addition to evaluating these features and safeguards, customers should also follow the usual investment best practices to protect themselves from potential fraud. Investors should remain wary of the fact that just because the underlying asset of the investment is gold, this does not by itself insulate them from the risks of investing. Finally, if the investment opportunity promises rewards and returns that seem too good to be true, then they probably are.
Robin Lee is founder and CEO of HelloGold, a Malaysian fintech that will be launching the world’s first shariah-compliant gold platform. He was previously chief financial officer of the World Gold Council.
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