First, a legal disclaimer. I am not an investment professional. I am not offering investment advice. Do not follow whatever I have written here blindly. Whatever I am writing is for my own entertainment. I will not be responsible for any decisions you make for any reasons what so ever. If you are fool enough to follow investment advice from some anonymous guy on the internet, with a netbook and some time to kill, perhaps your problems don’t end there.
Okay, now back to some analysis
A few Singaporeans are well aware that UOB (www.uob.com.sg) offers it’s customers a Gold and Silver savings account. Basically you can go up to the bank and buy some Gold and silver from the bank. The amount of Gold and Silver you have purchased from the bank will show up on your account statement just like the number of Dollars shows up on you checking account statement. So far, so good.
Now the problems begin. First, you cannot take delivery of the Gold and Silver. UOB is not a gold dealer. You go to a gold dealer and you can pay him some Singapore Dollars and collect an ounce of silver. You can’t do that with UOB. They will not give you the silver. Nor can you ask for it. You can buy and you can sell. This is what they call an unallocated account.
So what exactly is UOB doing with the money you gave them to buy the gold/silver? The simple idea of an unallocated account is this
1. You give UOB to buy some gold. Say 10 grams. Say you pay 500 Dollars
2. UOB takes the 500 Dollars and buys 10 grams of gold and stores it in their vault.
3. One day you may want to sell that Gold because the price has gone up to 700 dollars for 10 grams and you want to take the 200 dollar profit. You go to UOB and ask them to sell the entire 10 grams. The price is now 700 Dollars. UOB takes the 10 grams from the vault and sells it and get’s 700 dollars. Of that 700 Dollars they keep 20 dollars (depends on how long you stored it) for themselves for handling/delivery/storage charges and give you the 180 Dollars.
4. You thus made a 180 dollar profit. UOB get’s 20 dollars for their trouble of sotring/buying/selling and everyone is happy.
But what if UOB is not buying any physical silver and gold at all with the money you gave them?
How does it work then? There is a reason I got this doubt. When I asked them exactly what they are doing with this money I give them, they say that they do not share such details with customers. Now, this looks suspicious. Hell! Do they share this detail with the Monetary Authority of Singapore (MAS)? Does MAS even know?
My feeling here is that there are two cases
Case 1. UOB is dishonest: Several possibilities arise here. In this case you must just not invest in this scheme, close all your accounts with them and stop doing business with them altogether. I will not examine this option because, “come on, this is Singapore”. Things here are generally honest. Otherwise this Island would not survive.
Case2: UOB is honest: This is more likely. But if they are not really buying any physical Gold and silver, what’s really going on?
My guess here is that UOB is betting on the falling price of Gold/silver in the near Short term. That’s right. They are shorting the physical metals. I am sure they are not stupid enough to bet on Gold/Silver prices falling in the long term. You cannot run a successful bank like UOB for so long in a place like Singapore by being Stupid. There is also absolutely no way on heaven, hell or earth that the Gold/Silver price in SGD will be lower in 2017 than it is now. No way. So if people buy Gold/Silver now and sell in 2017, UOB will make a huge loss. So what’s going on?
I think the answer lies in the GST on Gold and Silver being lifted on OCt 1, 2012. On that day the Singapore Govt. will no longer charge a 7% GST on Gold and Silver purchases by the people of Singapore. The reason UOB Gold and silver is so attractive is that there is no GST/dealer premium applicable if you buy Gold and Silver from them. That is the real reason people are buying Gold/Silver via UOB instead of from their local jeweler/gold dealer (where you have the pay the 7% GST and another 2-10% dealer premium depending on the size and type of your purchase). Come October 1 this year, my guess is that several singaporeans will close their Gold/Silver accounts with UOB and use the proceeds to purchase real physical Gold and Silver. Thus if the Gold/Silver price in Oct 1, 2012 is lower than it is now, UOB will make a killing. I am strongly inclined to believe that this is their thought process.
Okay, but what if the Gold/Silver price in Oct 1, 2012 is higher than it is now? Won’t they make a loss? Yes, they will make a loss and depending on the size of their shorts, they may even go bust. But once again, I am inclined to think they are not stupid. They are a big successful bank. They have smart people and they have much more information than we do. They probably have plenty of information regarding what Gold/Silver will do in the short term. So let’s try to understand UOBs game plan
1. Oct 1, the price of paper Gold/Silver plunges and stays low for a couple months or so
2. Panicked singaporeans sell and decide never to buy Gold/Silver again. From Anyone. Ever. UOB makes a killing on these customers.
3. Astute and cautious singaporeans sell, but use the proceeds to purchase physical Gold/Silver. UOB again makes a killing on these customers.
4. Singaporeans with balls of steel do not sell any paper Gold/Silver but rather accumulate Physical Gold and silver. And after 3 months or so when the Gold/Silver price comes back up and over what they purchased at UOB, they sell! In this case UOB makes a loss.
5. Thus UOB is betting on 1,2,3. They are betting that there are not many people in category 4. As any investing veteran will tell you, UOB is correct to make this sort of bet.
Update April 17, 2013
Oct 1, 2012 has come and gone and as far as I can tell, Gold and Silver did nothing spectacular in or around October 1. Most of my speculation was wrong.
end of update
Okay, what’s a good course of action for a Singaporean? First what sort of person are you? Personally, I am the customer in part 3. So I will confine my analysis to that personality type. My balls of steel are limited to approaching cute women in clubs/bars/malls/MRT etc. When it comes to financials, I am a pussy. Right, So I was planning to sell on Oct 1 and pick up some physical. Let’s examine this strategy
On the Plus side
1. I get hold of physical silver without paying GST/Dealer markup. I also don’t care how UOB’s bet works out. Whether or not UOB wins or loses, I end with roughly the same amount of Gold and Silver which was my aim all along.
On the negative side
1. What if UOB loses the bet and has to close down and cannot pay me? The chance is very small, but it does exist.
2. What if UOB wins the bet and can pay me, but the Gold/Silver paper and physical market start diverging. I personally witnessed an example of this Divergence around 2008 when Silver plunged to under $12/ounce and Gold to under $800/ounce. But here was the problem. There was not a gold dealer on earth who was willing to sell physical metal at that low price. All of them were charging markups of up to 20% in case of Gold and 50% in case of silver. Some of them flatly refused to sell. In this case you may cash out the Gold/Silver from UOB, but may find yourself unable to buy physical at the price you sold thus incurring a huge loss. I believe this is quite likely. Dealers too are astute people. They will not sell if the price is too low. Man! this scares me shitless. Excuse me, I believe I need to go to the rest room or else I will crap my pants.
……………………………………………………………………………………………………………….Okay I’m back. And I have no bloody idea what to do now. Let me think about this. What do you guys think?
Edit on July 10, 2012
I see this post getting a lot of eyeballs but the next one on the same topic seems to get none. So I am just posting a link to it here to the next article in this series
Update: Dec 27, 2012
One of the hot girls I opened today told me that UOB paper Gold and paper silver is backed up by real physical metal outside singapore by some counterparty that she did not specify. But she did say that there was a counterparty. So this absolves UOB from any wrong doing. The Monetary Authority of Singapore is obviously on the Job. But counterparty risks still remain. If the counterparty fraudulent or goes belly up, I am not sure that Singapore authorties really have the power to punish this counterparty. So procedd at your own risk guys. But I am very happy that the Monetary Authority of Singapore comes up very competent in this whole drama