Every income group has a need for diversification. The one that is most commonly used is investment portfolio diversification. In that sense, you are right - the market that we want to serve is unlikely to have an investment portfolio

But they do need diversification. Their income/asset portfolio is long ringgit denominated risk - salary, savings, EPF etc. Whereas a lot of their costs are US$-denominated - petrol, food etc are typically priced in the markets in US$. In the event of a devaluation, their portfolio will be positively correlated and there will be a mismatch between their income/assets and their costs. They need to have something else that gives them the ability to diversify out of a long ringgit exposure. I believe that gold can provide that diversification for them and also enable them to have a inflation-linked return.

I can't gauge the threshold of the portfolio of your intended customer. Can you put a rough number so that we can talk on the same page ?
*edit* - I can see your sell price in your website. Where can I see your buy price ?

My issue is still the fee's involve even for holding gold. Since your a sifu in this industry, whats the projection for gold in 5 years ? Lets see if its worth the numbers.
Of course if US N. Korea and US launch a few more rockets, its a good thing for us right ? 

No reply from you....hmmm....

Anyway.....I make a few assumptions on your targeted customers' portfolio threshold....please feel free to correct the assumptions if they are not accurate.
1. I disagree every income group has a need for diversification. When the low income group's salary is not even enough to make ends meet every month, they are not in the position to diversify. They don't even have money to invest. So these type of customers cannot buy the "insurance" as you propose.

If you earn around rm50k p.a., you typically have around rm300-rm500 to save per month if you are careful. In the Asian financial crisis, this saving would have come in handy as rm devalued against usd.

2. For those who can afford RM100-RM200 per month, their portfolio should be less risky with more stable and reasonable returns. PNB products come to mind. ASx is a good choice for them at around 5%-6% pa (7+% for bumi). Gold on the other hand, has no return other than capital gains. As prices of gold is very volatile, gold is too high risk an investment for them.

These funds offer returns but they are typically rm-denominated assets and therefore exposed to rm risk. A portfolio, particularly in emerging markets, should have a diversification element beyond local currency. I agree that gold is volatile but its hedge quality is what you want if you are overweight local currency risk

3. And when they grow their investment portfolio to a higher level, they can consider diversifying into other vehicles like unit trust, shares, gold etc. However, as paper gold from banks are more cost effective, it is less likely they will buy from you. Except for a small number of ignorant people who never compare the cost of gold investment

Unless you bring your cost down to a level comparable to your competitors, how can your business grow ?

Most banks have a minimum investment level and a minimum management fee. We cater a segment that doesn't necessarily have the means to save at that minimum threshold, and we offer a means for our customers to liquidity through the Aeon loan product


If they need to hedge their expenses against US$, why should they buy gold instead of buy US$ itself ?

1. Gold / US$ has typically an inverse relationship. Ie. when gold is up, US$ is down. When US$ is up, gold is down. So gold is not a good hedge against US$. It is a good diversification from US$ though.

That's generally true. However, when usd is up, rm is usually down. And it usually trends further down vs gold. Gold is a good hedge against a weak ringgit

2. US$ is easily available from money changer in shopping centre. And US$ is very competitive especially like the one in Mid-Valley. Their spread is typically below 1%. No other charges and fees. Buy and keep and hedge against US$ expense pure and simple in your scenario.

3. Whereas if they invest in your gold, they have to pay 2% each way for buy and sell, and subject to 2% annual management fee. Total = 6% already. That is even before your spread. Let's assume you have a spread of 2%, the cost is already 8% (correct me if the numbers are wrong). If they buy at RM190 per gram from you, 1 year later gold price must increase more than RM204 just to break even. If gold price remain the same at RM190, they already lose 8% on their investment.

We don't have a spread. We quote one price (XAU in ringgit) and we charge 2% on the bid-ask. So the cost is 6%. We also believe that you should hold gold for 3-5 years. Anything 1 year and below is effectively speculating rather than saving. In my mind, Gold is a lousy asset to trade in unless you play momentum - as you pointed out, gold is volatile.

So if they want to hedge against US$ expenses, buy US$ note directly will be a more straight forward method. Gold is an alternative, provided the cost is low, which is not the case with the fees involved.

It typically requires a significant deposit to start a usd account. And so that is beyond the reach of most of our customers

Feel free to correct my numbers...

If you earn around rm50k p.a., you typically have around rm300-rm500 to save per month if you are careful. In the Asian financial crisis, this saving would have come in handy as rm devalued against usd.

These funds offer returns but they are typically rm-denominated assets and therefore exposed to rm risk. A portfolio, particularly in emerging markets, should have a diversification element beyond local currency. I agree that gold is volatile but its hedge quality is what you want if you are overweight local currency risk

Most banks have a minimum investment level and a minimum management fee. We cater a segment that doesn't necessarily have the means to save at that minimum threshold, and we offer a means for our customers to liquidity through the Aeon loan product

That's generally true. However, when usd is up, rm is usually down. And it usually trends further down vs gold. Gold is a good hedge against a weak ringgit

It typically requires a significant deposit to start a usd account. And so that is beyond the reach of most of our customers

We don't have a spread. We quote one price (XAU in ringgit) and we charge 2% on the bid-ask. So the cost is 6%. We also believe that you should hold gold for 3-5 years. Anything 1 year and below is effectively speculating rather than saving. In my mind, Gold is a lousy asset to trade in unless you play momentum - as you pointed out, gold is volatile.

Gold typically returns around the rate of inflation. In ringgit terms, this works out at 7+% p.a. assuming a 5 year hold

I believe UOB paper gold minimum is 10g without any charges ? So it is only around RM1900 to start investing in gold. This segment of customer just need to wait 4-6 months to accumulate enough money to invest. Their spread is just above 2% with no storing fees involved.
If you buy unit trust for foreign markets, although it is denominated in RM, but their returns are in forex because they invest in overseas market (but quoted in RM)

For example Asia Pacific Ex-Japan Equity (I believe it is called Ponzi scheme in FSM thread), the fund invests in Asia Pacific stocks. And the returns is on the mid teens % pa

If a person has "currency risk hedging" in mind, there are good alternatives besides gold.
The minimum for UOB is only 10g (I believe so) which is slightly less than RM2000 at current gold price. Is RM2000 a "significant deposit" nowadays ?

If you cost is similar to UOB bank, then I will agree with you. But your cost is too different from UOB.

Is your Aeon product launched yet ? Am I right to say Aeon will charge certain % to "pledge" the gold for cash ? If so, that will add further cost to invest gold through your company.
If we take the recent 2-3 years, gold return in RM is good mainly because of RM depreciation against other forex, not gold price appreciation. Good price is pretty flat after it falls from US$1800+ peak in 2012/2013. For the past 3-4 years, it is around US$1200 to US$1300+

And if you look back to the 80s to early 2000s, gold price hover around $300-$400 for the 20+ years period. Very very flat. While an investment with just 4% return will already double the principal in 20 years

So it is not true to say gold is a "good hedge" against RM.

If a person is worried about US$ expenses (like you said), then choose a direct hedge for RM/USD. Why put another uncertainty and risk (ie gold price fluctuation) into the equation if the purpose is US$ hedging ?

You don't need a significant deposit to hedge against USD account. Buying US$ notes is so easy through money changer. And the spread is <1%. Compare to your cost of at least 4%
If a person holds gold for 3-5 years, it means that the holding cost with your company will be :

Buying and selling 2%+2% = 4%
Holding cost 3-5 years = 6% to 10%

The total cost for holding long term is 10% to 14%

Gold price must appreciate that much just to breakeven.

Whereas your competitor only charges slightly above 2% for their spread, regardless of years of holding.
I guess the main issue of your business model is your cost of investment relative to your competition. Your offer of convenience is very attractive (but I saw in the gold investment thread UOB is launching online gold investment as well soon ?). Your only advantage is that you cater to low value investment, which if you must get significant number of these group of people only that your turnover would be big enough to cover your running cost.

I hope you can find ways to reduce your cost so that you can attract the middle class investors.

The other natural progression if the cost of investment is kept high would be turning into MLM model. Then sharing of profits with the layers of "business entrepreneurs" will also be a good alternative to grow the business

Gold typically returns around the rate of inflation. In ringgit terms, this works out at 7+% p.a. assuming a 5 year hold

With their cost model underlying buy sell each 2% fee, they will tutup business soon.

No lah, I guess the operational cost is low. Tutup kedai wont lah. Want to expand fast, a bit difficult.

They can expand to other countries. Just small offices to setup in neighboring countries can do business already. They have already the website so infrastructure no problem

There will always be "not so smart" people around which don't compare cost. So business will always be there

When they grow bigger, they can lower their cost. Then average income segment can be targeted.

This business can do one...just need to be patient because growth will not be fast.

From where and since when gold return around the rate of inflation?

I believe UOB paper gold minimum is 10g without any charges ? So it is only around RM1900 to start investing in gold. This segment of customer just need to wait 4-6 months to accumulate enough money to invest. Their spread is just above 2% with no storing fees involved.

You can look at the UOB website here for more details - http://www1.uob.com.my/business/GMIM/GMIM_pga.html. The minimum initial investment is 20g. And you have to buy/sell in 5g lots. If you dip below 10g, you will find that their fees are punitive

If you buy unit trust for foreign markets, although it is denominated in RM, but their returns are in forex because they invest in overseas market (but quoted in RM)

For example Asia Pacific Ex-Japan Equity (I believe it is called Ponzi scheme in FSM thread), the fund invests in Asia Pacific stocks. And the returns is on the mid teens % pa

If a person has "currency risk hedging" in mind, there are good alternatives besides gold.

I agree that unit trusts are a good way to hedge out. But the financial literacy required to determine what sector to buy and which fund manager to buy into is challenging for many. Gold is a much simpler hedge to get exposure to

The minimum for UOB is only 10g (I believe so) which is slightly less than RM2000 at current gold price. Is RM2000 a "significant deposit" nowadays ?

Yes. Rm2000 is a lot when you consider BNM's report last year that said 70% of Malaysians would struggle to come up with RM1000 in an emergency

If you cost is similar to UOB bank, then I will agree with you. But your cost is too different from UOB.

Is your Aeon product launched yet ? Am I right to say Aeon will charge certain % to "pledge" the gold for cash ? If so, that will add further cost to invest gold through your company.

When you take a loan out, there will be borrowing costs. But the borrower won't have to pay for our management fee. In fact, we will earn less if people take loans out because we will not make as much money from the loan product. But we believe that giving our customers liquidity in emergencies is an important part of our financial inclusion ambition

If we take the recent 2-3 years, gold return in RM is good mainly because of RM depreciation against other forex, not gold price appreciation. Good price is pretty flat after it falls from US$1800+ peak in 2012/2013. For the past 3-4 years, it is around US$1200 to US$1300+

And if you look back to the 80s to early 2000s, gold price hover around $300-$400 for the 20+ years period. Very very flat. While an investment with just 4% return will already double the principal in 20 years

So it is not true to say gold is a "good hedge" against RM.

What you described is what is considered a good hedge against currency devaluation risk. When the ringgit is strong, people will have more spending/saving power. But when the ringgit is weak, they need an alternative.

If a person is worried about US$ expenses (like you said), then choose a direct hedge for RM/USD. Why put another uncertainty and risk (ie gold price fluctuation) into the equation if the purpose is US$ hedging ?

You don't need a significant deposit to hedge against USD account. Buying US$ notes is so easy through money changer. And the spread is <1%. Compare to your cost of at least 4%
If a person holds gold for 3-5 years, it means that the holding cost with your company will be :

Buying and selling 2%+2% = 4%
Holding cost 3-5 years = 6% to 10%

The total cost for holding long term is 10% to 14%

Gold price must appreciate that much just to breakeven.

Your Maths is correct but given that gold has historically returned around 7% p.a. On a 5 year hold. Ultimately gold provides a real return

Whereas your competitor only charges slightly above 2% for their spread, regardless of years of holding.
I guess the main issue of your business model is your cost of investment relative to your competition. Your offer of convenience is very attractive (but I saw in the gold investment thread UOB is launching online gold investment as well soon ?). Your only advantage is that you cater to low value investment, which if you must get significant number of these group of people only that your turnover would be big enough to cover your running cost.

Yes. We cater to the underserved and unbanked. There are many options available for the more fortunate and UOB will hopefully have a successful relaunch of their gold product. I told them their earlier version was very bad - they are an investors in our company!

I hope you can find ways to reduce your cost so that you can attract the middle class investors.

As we scale up, we plan to pass our cost savings to our all customers

The other natural progression if the cost of investment is kept high would be turning into MLM model. Then sharing of profits with the layers of "business entrepreneurs" will also be a good alternative to grow the business

Thank you for your suggestion. We don't have plans to launch an MLM model. But we do have our own plans to attract customers.

With their cost model underlying buy sell each 2% fee, they will tutup business soon.

You can look at the UOB website here for more details - http://www1.uob.com.my/business/GMIM/GMIM_pga.html. The minimum initial investment is 20g. And you have to buy/sell in 5g lots. If you dip below 10g, you will find that their fees are punitive

I agree that unit trusts are a good way to hedge out. But the financial literacy required to determine what sector to buy and which fund manager to buy into is challenging for many. Gold is a much simpler hedge to get exposure to

Yes. Rm2000 is a lot when you consider BNM's report last year that said 70% of Malaysians would struggle to come up with RM1000 in an emergency

When you take a loan out, there will be borrowing costs. But the borrower won't have to pay for our management fee. In fact, we will earn less if people take loans out because we will not make as much money from the loan product. But we believe that giving our customers liquidity in emergencies is an important part of our financial inclusion ambition

What you described is what is considered a good hedge against currency devaluation risk. When the ringgit is strong, people will have more spending/saving power. But when the ringgit is weak, they need an alternative.

Your Maths is correct but given that gold has historically returned around 7% p.a. On a 5 year hold. Ultimately gold provides a real return

Yes. We cater to the underserved and unbanked. There are many options available for the more fortunate and UOB will hopefully have a successful relaunch of their gold product. I told them their earlier version was very bad - they are an investors in our company!

As we scale up, we plan to pass our cost savings to our all customers

Thank you for your suggestion. We don't have plans to launch an MLM model. But we do have our own plans to attract customers.

Thanks for the link.

RM2.12 per month is punitive ? 
Gold is not a good hedge for US$ at all. It is a volatile commodity. The recent years performance against RM is positive only because US$ appreciated ~30+%, not gold price.

If RM did not depreciate in US$ term over the last 2 years, then gold is a terrible investment over the last 5 years

Your argument of using gold as a hedge against US$ is very difficult to understand. In cold hard numbers, that is inaccurate. Please see below for the numbers
That’s what I said in my above posting about those hardcore poor. They can’t even afford to make ends meet every month. They should save up for rainy days first before even thinking of investment.

Investment should only start with 6-9 months of emergency funds. This fund should be left untouched. If you read the financial planning blogs/forum, that is the pre-requisite before a person starts investing.

Emergnecy funds should not be subject to risk too. Gold is a volatile commodity. If emergency fund is kept as gold, what if gold price reduce by 30% ?

A sound financial advice should be to keep emergency fund as FD/Savings/ASx funds which can cash out fast and principal guaranteed

If gold price depreciates, I will pity those poor people who thought they have enough but eventually finds out it is not worth as much as before
Hope you do explain to them for the past few years, gold price did not appreciate as much as RM depreciated against US$. Gold investment is profitable only because RM depreciated 30+% against US$

As such, gold is not considered a hedge against US$. Gold is piggy back on US$ strength

I am sure it is also your ambition that they are well informed of the true picture before they invest in gold
I don’t understand what are you trying to say about the different risk.

You initial claim is gold is a good hedge against US$ expense. That itself is currency devaluation risk (of RM).

If it is US$ expense (which is your original argument to hedge against), then what other hedging tool is better than US$ itself ? It is cheap, it is convenient and it has 100% hedging effect against RM devaluation. It is a natural hedge

Do enlighten what other risk you hedge against with gold  ?
Let’s use “historical return”. Your 7% return is based on a certain period. And since you suggest a 5 year holding period, let’s look at how gold performed in the last 5 years.

Assume your company started 5 years ago, and an investor bought gold from you for period Sept 2012 to Sept 2017, the return of gold in RM is :

2012 RM5.4k+
2017 RM5.7k+

Source : https://goldprice.org/spot-gold.html

In RM term, total return for 5 years +RM300 or +5.6%. Simple annual return was +1.1% pa

After your charges of 14% over 5 years, the investor made a loss of -8.4%

If we look at gold price in US$ term, gold price actually made a loss over the period :

2012 US$1.8k+
2017 US$1.3k+

In US$ term, total loss for 5 years -US$500 or -28%. Simple annual loss is -5.5% pa

And to prove my point of US$ notes is a better hedging tool against RM (instead of gold), here is the numbers :

2012 USD/RM 3.0498
2017 USD/RM 4.1980

Source : https://www.bloomberg.com/quote/USDMYR:CUR

Total return for 5 years +37.6%. Against -8.4% if a person invest in gold through your company, Meaning if a person wishes to hedge against US$ expense, he is a lot more successful than using gold as a hedging tool

Gold is not necessary a good hedge against RM. Gold will fluctuate in price. It may work for you, or it may work against you (as we witnessed for the last 5 year period).

If you have US$ expense to worry about, don’t use gold, use US$ directly. It is a 100% natural hedge.
Their infrastructure is bad, but their cost is the best in the market !

For those bigger investors, they have SPDR, mining companies as even better choices
If you can match UOB’s cost, I will be your customer
TLDR version of what I wanted to say :

1. Gold is another investment. It has its merit and shortcoming just like any other investment tool
2. Gold is not necessary a hedge against US$ expense in RM term
3. Gold is possibly a good hedge against other investment like stock and money market though
4. Gold price could appreciate as well as it could depreciate. Just like other investments. The risk is high as it's price is volatile
5. As such, we cannot claim gold price appreciate like inflation. It depends on which period we look at.

RM2.12 per month is punitive ?  biggrin.gif

If you only have RM500 worth of gold, RM2.12 per month works out at 5% annual fee. If you have only RM100, that works out 21% per annum management fee. so it really does depend on how much gold you have

Gold for Malaysians is a good hedge against the RM weakening. For Americans, it is a good hedge against the US$ weakening. For Thais, it is a good hedge against THB weakening etc