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 you should stop reading right now and switch on your TV to listen to Jim Kramer on Mad Money.
Welcome Back. This is a second in series of my thoughts and speculations on UOB Gold and UOB Silver. The first part is here https://masculineffort.wordpress.com/2012/05/08/the-very-strange-case-of-uob-silver-and-uob-gold/
In the last part I tried to get into what UOB is thinking when it comes to their Gold and Silver accounts. In this part I analyse what they can do legally to basically screw us over. Here are a few assumptions I will be making in this post
1. UOB is not buying physical Gold or Silver with the money we give them
2. UOB is not going to go bust. If the Gold price and silver price goes too high and they do not have the Gold/Silver to cover their shorts, they will basically change the rules of the game and screw us over rather than going bust to honor their side of the shorts
Here is what they can possibly do.
1. The Silver/Gold you hold with UOB can only be sold to UOB. You cannot sell to anyone else. My understanding so far is that they have been selling to us at the market price. I always made sure to check the gold price on google before purchasing from them. And I have been led to believe that when they buy from us, they will do so at the market price. But this begs the question. What is the market price. Where do they get the data for the market price? Is the market price something they define themselves? If the Gold/Silver price spikes too high, could they possibly offer us a lower price for our Gold? Could they do so legally?
2. Can they unilaterally terminate our accounts and just give us the money at any time of their choosing. Here a few scenarios
a. Hyperinflation. They just terminate your account and give you the Dollars. Suppose you have 10 grams of gold you bought at $500. Hyperinflation causes the gold price to rise by $100 every hour (Hey, this happened in Weimar Germany in the 1920s and in zimbabwe in the 2000s). They terminate your account when the gold price is at $5000/10gms. So you have $5000 in your account. But by the time you can withdraw that money to buy physical gold from a dealer, the price has gone up to $7500 (one day later). Congratulations, you just lost 33% of your purchasing power. And this is assuming that a dealer is willing to sell you Gold during hyperinflation. This is a huge assumption. In a hyperinflationary scenario, no one will sell you gold or silver. Your only hope is to use the $5000 to buy something right away, like an electric guitar or a tennis racket. Right away. Even if you don’t need it. Because it is more valuable than the cash. Seriously, what would you rather have in that scenario. A tennis racket or the 10 grams of Gold? But to be fair, I believe that the Monetary authority of Singapore will not permit hyperinflation in singapore. To prevent hyperinflation, all the central bak of singapore needs to do is not print any more Singapore Dollars. To me hyperinflation might be a medium sized risk in Europe/US, but not in Singapore. Unlike those countries the Singapore government does not have big debts which it needs to monetize. So in a hyperinflationary scenario, they will just put brakes on the printing press.
b. A big price dip: Suppose you bought the gold at $500 for 10 grams. And then after a few months, due to some speculative activity the gold price dips to $300 for 10 grams (This happened in 2008). But you don’t panic. You know that this is just speculative activity. You know that the Gold price will go right back up. You are confident as you notice that no Gold dealer is selling gold without a 30% markup/premium. So you decide to wait. But what if UOB decided to terminate your Gold account and instead deposit $300 in your bank account instead. UOB just made a $200 profit. And you simply cannot get 10 grams of gold for the $300 they put into your account. To me this is the more likely scenario.
3. Instead of abruptly terminating your account, they could do it indirectly. How? By raising storage costs. Instead of the current 1-2%, what if they made is 10% or 20% unilaterally. Can they do this?
Finally, to round this off, here is another curiosity. Funny thing is that the UOB staff does not seem very knowledgeable about the Gold Silver savings account their own bank is offering. Ever time I ask questions like like the one I raised in this post, they tell me that they will contact their main office to fid out before telling me. Some of them even go far as to mildly discouraging me from investing in the Gold/Silver account. Atleast one other blogger had a similar experience here
After you read his account, ask yourself this. Is this normal behavior? Have you ever met a businessman/salesman who mildly discouraged you from purchasing one of his own products? Hell! Have you ever met a salesman/businessman who was anything but extremely enthusiastic about each and every one of his products? So don’t you feel there is something strange here? I sure did. Seriously, what is going on here?
Okay I have my work cut out for me. I am going to go up to UOB and ask them about all the questions I raised in this post. As far as I can recall, I never got a any kind of agreement notice from them which I had to sign before opening the account. I’ll also ask them if they have such an agreement brochure. We always get these when we sign up for insurance or want to rent a deposit box in a bank or use some storage facilities. But it is curious I never got this for the Gold/Silver account
Will keep Y’all updated about this.
Update: new post on the same topic
Update April 15, 2013
ABN AMRO defaults on Gold deliveries. This is exactly what I was scared of.
I was afraid UOB would change the rules on us and now I see that ABN Amro has indeed changed the rules on it’s customers. The trick is very simple. Not only do ABN Amro’s customers not get their Gold, they also lose all their cash gains as their accounts are liquidated during a bottom in the market.
I am no longer afraid that UOB will do this, but I am afraid that UOBs london Counterparty will do this.