In my previous posts on UOB Gold and Silver, I expressed concern whether the Gold and Silver accounts at UOB were really backed by physical metal. While I do not have the answer, I have grave reservations. After all the paper gold market exceed the physical gold market by a factor of 10:1. For silver the ratio is greater than 100:1. Scary stuff. With numbers like these, I start doubting all paper metal contracts and would not recommend them to long term investors who are primarily worried about currency depreciation. And with GST abolished on most precious metal investments in Singapore, and with safety deposit boxes costing less than $100/yr, there is even less reason for the long term singaporean investor to go the UOB way.
But that does not mean that UOB Gold and UOB silver is useless. It is useful to certain classes of people
3. Precious metals dealers
I will tackle the last category in this one. In fact I know at least one precious metal dealer in Singapore who uses UOB Gold and Silver in this way. For purposes of this post lets call him Jin.
Jin runs a precious metals dealership. His business is selling precious metal coins and bars to clients. He charges a dealer premium of anywhere from 3% – 15% depending on the product. He makes his income from this dealer premium. Fair enough.
Now when a client places an order with Jin, he must sell at the market price. Suppose the market price for Gold at the time of placing the order was SG$2000/oz, then Jin must sell the Gold at $2080 (assuming 4% dealer premium) to the client. It does not matter at what price Jin bought the Gold. Jin might have bought the Gold two months prior when the Gold price was $2500/oz. It does not matter. Jin must sell at SG$2080 and incur the $420 loss. Jin cannot tell the client that he bought at SG$2500 and so will only sell at that price. He cannot tell the client to come back later. That is bad business. So what must Jin do?
Some of you will argue that it does not matter that Jin incurs a loss on THIS transaction. After all he conducts thousands of such transactions a year and in the end everything averages out. This is true. But Jin needs a steady income. Jin is happier making a steady income of SG$10000/month instead of making no income for 11 months a year and making SG$120000 in the last month. Though he has made the same money for the year in both cases, the second case is too uncertain. It feels too much like gambling. It is unsteady. It is erratic. And if Jin goes that route, he will lose his hair, his health, his erection and his wife. Nope, Jin needs a steady income for the sake of his sanity. So what to do?
Another solution is that whenever he receives an order from a client, Jin himself must place a similar order at the same time with the Gold refiner/mint from where Jin gets his supplies. This way Jin is merely an intermediary/middleman between the refiner and the client. And the extra 4% commission is his income. However if a client places an order with Jin for 1 ounce Gold, Jin cannot place an order of 1 ounce with the refiner or a mint. Jin can only place big orders with the mint/refiner. Those guys deliver only to big Gold orders such as 400 oz at a time. So Jin probably makes only a few big orders per year with the big refiner at some times of the year while he conducts thousands of small transactions with his clients all year round. So now what to do?
Some of you will say that Jin must buy on dips. Fair enough. Buy on dips and sell on peaks is a common trading mantra. But how the hell are you supposed to know whether what you are experiencing is a dip or just a part of a valley. Sure the price is low. But it could go even lower next month when a majority of Jin’s customers might order. Besides, Jin is a Gold dealer. Not a trader. He makes his income on the commission, not on trading. If he had good trading instincts, he would focus on trading and make his income that way. Why the hell must he sell Gold to you? He is not a fool! So what must he do?
Enter UOB Gold and UOB Silver. Both these investments charge very little premium (less than the dealer premium) on the buying and selling of Gold. And you can place small orders with them. Aha! This is very useful for Jin. So every time a client places an order with Jin for a few ounces of Gold, Jin buys the exact same amount from UOB Gold. He pays UOB a commission of 0.5% while he gets a 4% commission from the client. This is a total of 3.5% which he gets. Jin is happy to sacrifice the 0.5% for a little bit of stability in cash flow. And every time Jin has to make an order with the Refiner, he sells all his UOB gold and buys the exact same amount from the refiner. Thus UOB Gold becomes an intermediary that allows Jin to hedge. UOB Gold becomes a hedging instrument. It is useful as a hedging instrument.
To be sure, Jin does not depend on UOB Gold entirely. He still does some trading. If there is an obvious dIp (like today where Gold dipped to US$1521/oz), he still places a large order with the refiner. It is just that UOB Gold allows him the luxury of Hedging and generating a bit more stable cash flow for a small penalty (The UOB premium)
Thus paper Gold/Silver instruments do have some uses to people who buy and sell often. Just not to small fry like you and I who are trying to protect our savings from inflation.
Update: April 15, 2013
As I write this, the price of silver is around SG$29/oz. No dealer in the world is going to sell physical silver to you at this price. This is your chance to pick up some cheap silver from UOB as they will sell at any price. Now one day (in a few weeks or months), silver will be back to SG$40/oz. At that price dealers will sell. When that day arrives, you sell all the silver in the UOB account and use the cash to buy some physical silver from the dealer. In this way, even though you paid the Dealer $40/oz, you effectively bought it for $29/oz. Now do you see the uses for UOB Silver and Gold? This is the correct way to use the UOB Silver and Gold account for humble Singaporeans like you and I.
The metals have suddenly crashed for no fundamentally sound reason. Here is a chance for you and China to pick up some precious metals on the cheap. As Max Keiser says imitating the Chinese people “Confucius Say, IMF stupid, sell Gold, we buy”. Take the comment in Good humor please. Do not get uptight and accuse Max of racism. He has a lot of admiration for the Chinese people.