Friday, June 19, 2009

A Wrong Way in Gold Investment - Pawning

Recently I came across a blog that teaches people in gold investment. Basically it is asking you to buy gold, then pawn it to get back 65% (Arahnu) cash, then use the money to buy more gold. It then shows you if the gold price goes up a little bit, you earn a lot more than just simply buy once. At the very end it also mention there is 'a bit risky' but absolutely in a misleading way.

Basically this is a method called Leverage. You have $10 and you know you can earn $1 out of it but if you apply Leverage techniques you can get more than $1. It is also the same way how Bank can lend out 10 times more than what they actually have. ( currency turns evil story )

However, his teaching is one of those 'seems cool' but Absolutely 'Digging your own grave' case! Which also shows how absolutely a nonsense fool can spread knowledge to make more fools. Also exactly the reason why there are still 90% of world population will NEVER achieve true finance freedom, while digging deeper to their own graves.

This so called Gold Pawn is a very common pratice among one of Malaysia's ethnic group. There is even a standard govern policy for it. Basically you can pawn your gold with them, get back 65% cash. Then you need to pay about 0.75% safekeeping fee per month. Usually You will need to repay your borrowed amount in 6 months.

If you have been following malpf, you may have known one key preaching topic is that 'you must look at the real numbers and NOT just the general concept'. To simplify this discussion, lets ignore the normal 4% price gap in gold trading. Lets just assume we only need to pay 0.75% for one month and the price move up down 10% in one month.

Case 1 : Buy Gold
You invest $10,000 and price moves up 10% in one month, you earn 10%

Case 2 : Buy Gold, Pawn Once and use the pawn money to buy gold again.
The price moves up 10% only, but after minusing the safekeeping fee and repawn back the gold to sell all, you will get 16.46% net return. (sample calculation)

Case 3 : Pawn twice so its as if you have 3 golds, but 2 at the pawn shop, 1 at your hand.
Price moves up 10% a month, your net earning would be 20.66%

As you can see, the total amount of capital is the same, $10,000 but you could earn 10% - 16% or 21%. That is the power of Leverage. But wait, lets see what happened when the price goes DOWN 10% instead.

Case 4 : Buy Gold once
Price goes down 10%, you lost 10%.

Case 5 : Pawn Once
You lost 16.54% (sample calculation)

Case 6 : Pawn Twice
You lost 20.79%

You may already observe that there is a slight difference between winning and losing ratio.
When you win, you win less and
when you lose, you lose slightly more.

Pawn Once : Win 16.46% Lost 16.54% Difference 0.08% Disadvantage
Pawn Twice : Win 20.66% Lost 20.79% Difference 0.13% Disadvantage

Basically there are 2 facts you can get out of this :

1) The longer you use this Leverage technique, the more you will lose.
2) The more number of times you pawn, the more you will lose.

Back to the beginning of this article, the Risk of this technique is NOT a bit but the Risk is DEFINITELY higher than the Reward. The best argument he can legitimately comes up with is the disadvantage rate is not that high. Ie. compares to casino gambling where the disadvantage is at the range of 4%.

Think you found a golden goose ? Look carefully next time ....

23 comments:

alantanblog said...

Good info!

By the way, Is Gold a good Investment now?

Public bank even got saving Book Concept on Gold Investment!

Michael Tsen said...

Physical Gold is 'Always' a good option to 'buy and keep' because when all else fail today, people WILL go back to gold - the money created by god.

As for should one 'invest, trade, buy and sell' gold now ? malpf always preaches NOT to. Main factor is the 2-4% price gap. To 'trade' gold, one may as well invest into gold business related stock or gold index if you can find one, the fee is usually less than 1% and would have similar effect as gold price movement.

but if one insist to trade gold using technical charts, don't forget to check the graph in multiple time span, like this example

Hope this helps ...

ChampDog said...

Perhaps you can show the exact calculation of 16.46% for case 2?

Michael Tsen said...
This comment has been removed by the author.
Michael Tsen said...

sample calculation for Case 2 and 5 here

Anonymous said...

How about trying out Gold bar or paper gold in overseas if u dont find these in Malaysia?

It sounds too silly while reading this post and pity the situation in Malaysia.

Anonymous said...

I forgot to tell you, it is an interesting topic. Please keep it up.

Michael Tsen said...

yes we are having more and more choices on physical golds, that's why recently this pawning strategy start to mushroom again ... you cann't pawn a gold deposit book :)

thks for your compliment

Anonymous said...

Can anyone just walk into any bank to buy any gold bars? Can anyone set up any special bank account to trade gold?

Michael Tsen said...

can buy physical gold OR open a gold account like the normal saving account, read below link on varies ways to invest in gold

http://malpf.com/2009/04/where-to-invest-in-gold.html

Gold IRA said...

The blog has really helped me think from another perspective as well and have given me a wider view of the entire scenario.
Watch a free video on Gold IRA.

Anonymous said...

It is profitable if a person know what they are doing. For me, I bought physical gold for LONG TERM investment/protection. Holding physical gold give me flexibility to do small scale "trading" of my physical gold to earn some profit and enable to to add more gold in my holding. OK, what about pawning through arrahnu bank rakyat? I did it and found it is profitable when the price of gold is climbing up. Of course i started with some capital, then I bought the gold. This gold I pawn at BR and I'll get 65% of gold value. This money i will deposit somewhere appropriate. Recently the gold price was increased significantly. After about two weeks I revalue my pawn at BR and I got net profit RM 1500+ for my 490g gold within 2 weeks after deducting storage fees for two weeks. With that money+my additional cash, I added few more grams to my holding. I would definitely redeem my gold if i believe the price pattern would not profitable to pawn. So...in conclusion it is not as gloomy as you try to demonstrate. In fact a lot more other way to play around, not just arrahnu and it is fun. Lastly but not the least it is not correct to generalize that people who pawn their gold are digging their own grave. May be some of them are but definitely not all of them are dumb.

Michael Tsen said...

There will be some ppl who actually make money while digging their own graves, you don't have to agree digging own grave must be a bad thing. But the act of digging grave is undeniably a fact as described strategically in this article.

like you have demonstrated yourself, you are assuming you know exactly when the price will go up and down, that is 1 out of 4 possibility your pawn will help you. The pawn will make your situation worse in all the other 3 scenarios, wrong up, wrong down and wrong up and down.

if you are always right on both up and down, then you can do so much more than pawning, you can good 100x leverage and one price movement alone make you a millionaire ...

there is nothing with pawning, pawning gold has been a culture in certain society ( mine too ), but its is NOT a strategically balance portfolio.

If one is happy living his whole life pawning gold, he should really spend some time learn something new to expand the horizon.

Anonymous said...

""like you have demonstrated yourself, you are assuming you know exactly when the price will go up and down, that is 1 out of 4 possibility your pawn will help you. The pawn will make your situation worse in all the other 3 scenarios, wrong up, wrong down and wrong up and down.

if you are always right on both up and down, then you can do so much more than pawning, you can good 100x leverage and one price movement alone make you a millionaire ...""


I NEVER said that i know exactly the price movement. I dont know why you assuming I did. I just want to ask you, Does people like Warren Buffet know know exactly the share price movement? No. Is he always right in predicting share price movement? No. So who am I to claim myself and yourself to allege me with such statement?

The point is, the price movement of international gold market is also influenced by geopolitical as does with share price. Same goes with the physical gold about the timing you want to sell or buy or pawning. At the end you may make profit or loss.

I don't want to extend this argument further. You are entitled to your opinion, I just to make a point that the generalization is not acceptable especially in areas where we are not totally familiar.

Michael Tsen said...

this 'generalization' you refer to consist of data, numbers and proof of exactly why this pawning strategically disadvantaged.

toronto hypnotherapy said...

Knowledge giving Article! I appreciate you. I completely agree with you. If we talk about current scenario then it is must be update. I enjoyed reading. I would like to visit more for more queries.

Michael Tsen said...

everything needs to be updated, thanks for commenting.

Anonymous said...

malaysiapersonalfinance.blogspot.com; You saved my day again.

Toronto Hypnotherapist said...

That doesn't even sound like a good idea, I don't know why someone would buy that concept. Agreed with you that it's not a wise investment.

minyak wangi original said...

I have read somewhere that gold can't be treated as investment, it's more about asset preservation, what's your thought about that?

Michael Tsen said...

yes, all along gold is a preservation finance tool.

however finance market has become so virtual and big that some fundamentals may not hold solid effect anymore. hence the speculation of gold makes it hard to say 'now' its not an investment tool.

personal finance wise, continue treat it as a preservation tool. that way at least you achieve your goal. if it does get speculated, you 'may' get extra return ...

hope this helps.

Anonymous said...

sorry to interrupt.i think there is no wrong or right technique just if it can give benefits to u.actually its good to have pawn system.just you need to recalculate.Then,evaluate your condition n situation.Actually i agreed with u not just know the concept but think about it...it has a good n bad side depend on how wise the person managing their situation...conclusion...great benefits come with great thinking...

Michael Tsen said...

true, pawn system is a very important piece of finance. .. for a large public of whom have no assess to corp style finance etc credit card, check books. ..