On gold: the Genneva scandal

Just my thoughts on the issue - a couple of friends asked me about it, seeing that I'm in banking and all but at the time, I didn't know much about it - only what I read in the papers when the whole thing blew up.

So being the usual KPC (kay poh chi, although I'm not a 'chi', tqvm); thought I'd do a bit of digging and while most people these days are very sceptical about what the government does (including yours truly), I must say that the raid by BNM and the police has its merits.

Assessing the situation by fundamental principles of the set-up, operations and sales pitch by Genneva; there is a real disconnect. To break it down simply:

1. It is not set up as a bank, it cannot accept deposits. It is set up like a retailer: "you buy gold from me" but it starts getting muddier because;
2. They promise you physical gold but then persuade you, for practical reasons of the safety of your gold, to accept a promise on paper that you can get your gold at any time.. just not now.. so colour me stupid but isn't that almost like your basic promissory note / currency backed by gold? Is it now behaving like a bank and not a retailer? THEN they promise their investors, oops, sorry, customers:
3. A return! of 2% a month! BUT it's a "gift" wor... based on Islamic principles wor... hibah wor... child, you know the sayin' "don't look a gift horse in the mouth"? Mm hmm...! Seriously, in what world can someone guarantee you a 2% fixed return per month i.e. 24% per annum FIXED RETURN?
4. Does Genneva run a treasury / investment department to play the gold markets to get these kinds of returns? Can any portfolio guarantee you a 24% return on just one commodity? Fund managers can tell you that historically they could have hit 24% before but it is not guaranteed.

So why did BNM raid the place? Based on the points above, their reasons should be:

• Collecting money and promising a return - doesn't matter that it is hibah, Genneva is essentially taking deposits and promising to pay interest - means they are behaving like a bank without the controls in place to safeguard their customers' money
• Unconscionable pricing - the gold being sold is at a very high premium above the spot price. Basically, customers are being given back every month a part of the price they paid for their gold; it's like, I charge you $130 for something that is worth $100, then I give you back $2 every month but tell you it's a gift but actually, its from the money you gave me. Dunno whether to laugh or cry at this...
• Pseudo-Ponzi scheme - although there is a physical substance (the gold bullion) at the centre of the transaction, effectively, a lot of the customers have not received their gold and more importantly, after BNM and the police have gone through Genneva's books - There Isn't Enough Physical Gold that Matches the Amount of Money Collected. 
• So in sum: essentially accepting money in exchange for gold but not delivering it (don't even have the gold), guaranteeing returns but likely paying it out from their initial profit margin, positioning the whole thing like an investment but it's actually more like pushing the sale of over-priced gold.

Now, sad to say, after reading the passionate and emotional appeals of the investors (aka suckers) [including the usual hard luck stories about paying for medical bills all - why am I not surprised that an Indian lady said that? I'm too cynical]; they just don't get that they have been duped at all, even to the extent of saying that it is such an "innovative investment scheme" and accusing everyone but themselves about getting into this.

Dey, I've been in banking a while now (too long if you ask me :p) and it all boils down to a few simple principles:

1. There is no such thing as guaranteed returns
2. Innovative investment vehicles indeed do exist but they require a complex system of contracts, systems, operations and compliance to make it happen. Unless you can show me that Genneva has a brilliant and deep pocketed team that plays the gold market and can consistently get you a 2% return a month; then it means the whole thing was a scam.
3. There is no cash flow in gold, you can hold a gold bar physically either yourself or in Genneva's vaults but it won't produce any cash for you, unlike properties, shares, bonds and fixed deposits, right? So if there is no cash flow, where is the hibah coming from? tet! Ponzi.

Anyway, most likely the investors who have not received their physical gold are going to have to take a loss on this. Sympathies to them (but to an extent only) because really, you should have been more sceptical of schemes like this. 

If you had wanted to buy gold, get it from a reputable retailer and make sure your bullion is issued by an internationally recognised assayer!

And don't look at gold as a generator of income, it just cannot do that. It is meant to be a store of wealth or to be "consumed" in jewellery and high-tech goods like microchips. So buy it to keep and sell at a much later date but don't expect it to give you fixed, regular returns. It is impossible.

Update 27 September 2013: The directors have been charged with 900 counts of money laundering and illegal deposit taking.