A friend of mine who operates a food stall introduced me to Genneva Gold a month ago. He told me that it is a sure and secure investment which yields a return of 2.5% per month! Now that works out to be a return of 30% pa. According to my friend, Genneva Gold operates like a goldsmith. They sell gold to investors at RM130 per gram [minimum purchase of 100 g at RM13,000] with a guaranteed buy-back at the same price in 3 months. In the meantime, Genneva Gold will pay investors 2.5% every month which Genneva calls a discount.
My friend says it's the best investment ever because it generates fantastic returns and he has the security of holding physical gold. Sounds good?
On the face of it, the scheme looks legal. It is a sale of gold at a discount with a 'put option' given to the buyer to sell the gold back at the original price. But one key question which I asked that my friend could not answer despite checking further with the agent who sold him the gold:
How can Genneva Gold generate sufficient profits to pay its investors returns of 30% per annum?
In order for Genneva Gold to pay its investors 30% pa [and pay its agents commission plus all its overheads], Genneva Gold would have to consistently generate profits of at least 50% pa on its investments using the money that is placed with Genneva Gold by investors like my friend.
Warren Buffett, the Oracle of Omaha, is the greatest investor in the world, bar none. He has consistently generated returns of about 20% pa since he first started a half century ago. No one can match his record. No one.
So how is Genneva Gold going to generate returns that more than doubles Buffett's? I am told that the company is a goldsmith selling gold but that does not answer the question. We all know that no goldsmith will ever guarantee you a 'buyback' at 100% of the price you paid him for the gold purchased. And on top of that, pay you 2.5% per month on the price you paid him for the gold. So what's the catch?
Last week, it was reported in the Star that Bank Negara had started a probe into Genneva Gold whether the company is taking deposits without a licence. Even if Bank Negara concludes that Genneva Gold's business model is not a deposit- taking scheme, that will not answer the key question how Genneva Gold can offer annualised returns of 30%. Until that answer is forthcoming, then I still believe the deal is just too good to be true.