The important takeaway here is the need to take physical delivery of precious metals. In this case with the Gold Guarantee, paper currency could be sold to buy physical gold albeit at a premium. Buyers could still hold onto the physical gold if the company shutters and default. But those buyers who exchanged physical gold for a paper receipt with the promise of higher returns are taking substantial risks to earn a higher profit.
Note that there is profit but at higher risks. So as long as the scheme is operational, people will make money and tell others that they are making money. The music stops when the scheme becomes unsustainable.
It’s interesting that gold is the real money which had intrinsic value. Buyers relinquished paper currency, which had value when there is confidence in it, to buy gold. But they were convinced to relinquish physical delivery of gold (the real money) for a paper receipt which had substantially less exchange value than paper currency since it will not be accepted outside of the Gold Guarantee. It is a substantial downgrade from where they first started – when they still had paper currency!
Source: AsiaOne – Gold trading firm’s founder ‘uncontactable’
“Investors who have poured large sums into a local gold trading company are growing increasingly concerned over the fate of their investments. They say The Gold Guarantee’s founder and chief executive, Mr Lee Song Teck, has been uncontactable since he sent out an e-letter on Jan 8, which detailed the company’s future.”
“The company offers an investment scheme whereby investors buy gold at a premium and receive monthly payouts, depending on how much clients invest.”
“Clients can elect for the company to keep possession of the gold, and get a higher payout. This, after they buy into the scheme through agents who earn a commission.”
“One customer of The Gold Guarantee, who did not want to be named, visited the firm’s shuttered office in Boat Quay after hearing on Monday that the firm had run into problems. The 40-year-old, who works in the service industry, said she invested $189,000 in 2kg of gold last month, but does not have physical possession of the gold. She said she opted for a “safekeeping receipt” instead, as her agent told her she would receive a higher monthly payout that way. “I’ve been calling the agent who sold me the investment scheme but she hasn’t been answering calls since Monday night,” she said.”
“This incident comes after another gold trading company, Genneva, left more than 10,000 investors stranded last year. Genneva is being investigated by the Commercial Affairs Department (CAD) for financial improprieties.“