Exercise caution over buyback schemes

I welcome the Monetary Authority of Singapore's (MAS) intention to increase the protection of investors in gold buyback schemes ("MAS beefs up safeguards for retail investors"; yesterday).

But I am concerned that it may give a false sense of security that gold buyback schemes can be made fail-proof through increased regulation by the authorities.

I have relatives who invested in the gold buyback schemes that were sold by Genneva.

They did receive their monthly dividends as advertised, but I wondered (as this was not made clear to them) how the company could pay investors regular dividends that were many times higher than the prevailing market interest rate.

Indeed, the attractive payouts were too good to last, and the company eventually folded very abruptly. Fortunately, my relatives were left relatively unscathed by this because they had held the physical gold in their possession, instead of surrendering it to the company when it requested them to do so for "inspection".

Genneva's business might have been sustained had the gold price risen, thus allowing the company to make a profit by reselling the gold bars returned to them by their customers. Instead, during the period of time when Genneva was in business, the price of gold was at a constant decline.

Overall, gold buyback companies work on a risky business model that assumes the gold price would constantly be on the rise. But as we have seen for the case of Genneva and other similar companies, they could go bankrupt if the price of gold is in a sustained decline.

Consequently, people who wish to invest in gold are better served if they purchase it directly from banks or from bullion retailers because, in so doing, they are able to retain the gold in their possession, instead of having to worry about whether they might lose their assets should the company suddenly declare insolvency.

Chan Yeow Chuan

A version of this article appeared in the print edition of The Straits Times on September 24, 2015, with the headline 'Exercise caution over buyback schemes'. Print Edition | Subscribe