All that glitters is not gold

There is a gold craze going on. But before you jump on the bandwagon, do a little homework so that you don't get your fingers burnt.

COMMENT

Everywhere, people are buying and talking about gold. This is not something unusual for a Malay lad like me, especially during “kenduris” (feasts) where you get to see all the “makcik-makcik” (aunties) showing off their investments from Poh Kong and Habib Jewels. However, this time around, even the young ones are buying gold in great galore.

Even more peculiar, instead of the usual jewellery, people are buying solid gold bars as an investment. It really hit me when I saw our company secretary monitoring gold prices through an online gold tracking index and updating her Facebook status and posting graph snapshots whenever gold prices hit a new high, something she used to do during the Farmville fever.

Now I am no economist nor do I have any accreditation in business, accounting or finance. By profession, I am actually an electronics engineer, and so you may ask, “What in the world does an engineer know about investing anyway?”

Before we go on, let us look at this from another perspective. We keep hearing bankers, market researchers and analysts talk about money, investments and market on Bloomberg and CNBC only to end up in bailouts with taxpayers’ money. So, why not for once try listening to an engineer who calls a spade a spade?

Once upon a time gold was a currency; one day people got tired of carrying the heavy metals so they invented paper money.

As a reference point, they back money with the value of gold, for example RM3 is equivalent to one gram of gold hence referring back to when people bartered one kilogramme of rice to 10 grams of gold; the price of one kilogramme of rice is now RM30.

Apart from being the global currency, gold also has its own demand; for instance, gold is an excellent heat and electrical conductor so it is used in many industries. Apart from these, it is also used to make jewellery, medicine, beauty products and many more.

So thanks to its rarity and usefulness, gold will always have a value of its own. Let us just say one day the US dollar crashes. Gold will be the preferred currency, which is why some prefer to store gold in their vault as a method of preserving wealth because people are always willing to trade with gold.

Investing in gold

So how do people make money from gold? Now since gold is a chemical element taken from earth, it can’t be manufactured (unless you are an alchemist with a philosopher’s stone).

So to make money out of gold is the same way you make money with every other commodity – by taking it and turning it into something even more precious: mine it raw from the earth and then sell it to the market or become the middle man and make a profit when trading it.

So when you say you are investing in gold, what you are doing basically is being the middle man – buying raw gold bars at a certain price, keeping them and when the demand goes up or supply runs low, you sell them off at a higher price.

That is how you make money by investing in gold. Any other way, whether they call it a special investment method or some fancy Arabic ala Islamic financing name, if it does not conform with the golden rule of buying low and selling high, then it is a load of bull manure.

In Malaysia, certain banks offer you gold accounts: basically you buy gold and deposit it in their banks. When the price of gold appreciates, you make money; if it depreciates, you lose and the banks take a certain amount of commission through the transaction, simple.

Now I got curious seeing people holding glittering gold bars and was wondering where they bought them or how are they are going to sell them. And so I asked around. I learnt that there are a few companies that sell these gold bars and offer “investment schemes” with them.

Basically, you keep the gold bars and every 90 days you deposit them into their keeping (or account) for a few days for them to do trading. In return, they will pay you a monthly dividend of 2.5 percent based on the price that you purchased the gold from them.

Then to sweeten the deal, they have this buy-back policy: no matter how much the price of gold fluctuates, they will buy back your gold (when you want to cash out) based on market price or at the price when you bought it, depending on which is higher, hence offering some sort of insurance.

Let us do some maths here: 2.5 percent monthly is a dividend worth 30 percent annually, so for them to make money in order to pay you the dividends, the price of gold needs to appreciate at the same rate as well.

Gold price artificially driven

So let us just say that today the price of gold is about RM100 per gram, next year it needs to be RM130 per gram and, if we do a five-year calculation, to sustain this business, the price of gold must be around RM371.30 per gram or a 370 percent increase of what it is worth now.

Before you buy that gold bar and partake in this investment scheme, bear this in mind: unless you are confident that the price of gold will go up four-fold in five years, you may want to rethink investing in such a mechanism.

It is true that gold prices have gone up significantly in the past 10 years, but always be wary of these schemes that guarantee you fixed returns over something that is open to fluctuations and speculations.

Unlike petroleum, coal or wheat where prices reflect the actual demand and usage, gold price is artificially driven so there is a good chance of a bubble. In other words, the gold price is high now because people are buying it for investment in the hope that it will get higher in the future and not because they really need it.

Whatever it is, if you are thinking of investing in gold, the best way to do it is the traditional way – buy and sell – rather than going through some schemes whose modus operandi seems similar to the forex and Swiss cash schemes not so long ago.

Moreover, Bank Negara is currently investigating several companies dealing with gold investing schemes such as The Gold Label Sdn Bhd, Etika Emas Estet Sdn Bhd and Genneva Sdn Bhd.

Before you get into something, do your homework: check out Bank Negara’s official website. Remember folks, not all that glitters is gold.

Also read:

Reference on the investigated companies

Zaidel Baharuddin is Mr Right, Mr Right Wing that is, electronics engineer by day writer by night, Frank Sinatra fanboy all day long, catch me at WirawanWeb.com, lipassepi.blogspot.com or follow me on twitter via @Sinatra_Z. He is a FMT columnist.