The Yellow Fever

This is meant to be a short post, it's Sunday night anyway =p These dodgy schemes of gold investing have stole the limelight in the newspapers for several days. We have seen many people from all wakes of life investing into gold with the promise of grandeur returns (not yearly ones but monthly lolx). I put in picture to explain how these schemes work on a high level basis:

Life is soooo goood la....how does it pay 1.5% Hibah per month? Remember the 25% upfront profit? By calculation G-firm is able to sustain the 1.5%*12 = 18% per annum returns of Hibah to a customer for a full year. This model works fine when GOLD PRICES KEEP GOING UP or NEW CUSTOMERS KEEP COMING. The mantra buy low, sell high only benefits the firm not the customer. When the deal is too good to be true, IT IS USUALLY A PONZI SCHEME =) Here's another good read, in fact the best explanation I have seen from another blogger: http://1-million-dollar-blog.com/genneva-gold-scam-explained/

To the disbelieve of ordinary folks, gold is just like any commodity. IT DOES NOT GO UP ALL THE TIME.

Then why has it spiked up these few years? Demand from China/India? Neh....back in 2005 (not in the chart below), only 16% of gold's demand went to investment. Now it is a staggering 40%!! Everybody's doing it which suggest that a dangerous amount of speculation is on board which could potentially develop into panic selling similar to the tech bubble burst.

*World Gold Council i an association whose 22 member comprise the world's leading gold mining companies, representing approximately 60% of global corporate gold production.

If you have gold now, it's time to review your holdings. If you are thinking about getting into gold, think twice and HARD. A few useful indicators to look out for. 

No 1. If the central banks of major economies start raising interest rates, it is tough for all investment classes which includes gold. Because there is little point in putting cash into the banks when interest rates are low, people will buy gold as a hedge against inflation.

No 2. If the US dollar has strengthened, decrease in gold prices will follow. This is because people use gold as a substitute/hedge for the world's reserve currency.

IMHO I do not see both no.1 and no.2 happening in early 2013. Unless growth picks up again in the US, will need to see what happens after the US elections in Nov 6 2012 (forget EU, it's a big mess) the world economy looks bleak for next year. If US does recover better than 2012, gold would not hold around current prices for another year.

Since this is a short post, I will probably re-edit this at a later date with more charts/data.