'Gold Leasing' Boiler Room Investment Scam

For legal reasons I won't post links to articles and news reports referring to this fraud and examples, even though it's discussed on the BBC website among others, as it's more important that people are warned rather than get in to issues over particular examples.

I consider myself to be pretty informed about financial affairs and investment, having spent my whole life in banking, but the whole concept of 'gold leasing' seemed bizarre, so I was moderately surprised to discover that it does exist BUT NOT as an investment for the general public.

This article gives a clear and simple description of where and how 'gold leasing' takes place

http://wallstcheatsheet.com/stocks/lets-talk-about-gold-leasing.html/?a=viewall

Gold leasing is a process whereby central banks lend their physical gold to banks in exchange for a small interest payment and a promise to pay back the gold.

Not only did central banks want to earn interest on what would otherwise be a “non-performing” asset, but the banks that they leased the gold to — called bullion banks — were making money, as well. Bullion banks found it profitable to put on a gold carry trade. They would sell the gold into the market in exchange for a currency or bond that had a higher yield than what they were paying the central bank for the leasing privilege.

The problem for an ordinary investor who is not a part of this process (i.e. not a Central Bank or bullion bank) he is leasing a product as an investment that actually has a negative yield (the leasing cost) and it cannot be sold or invested to earn an income, as he doesn't own it. Even if the value of gold increases he won't benefit because his obligation is to return the gold he originally leased.

A bullion bank is able to sell the gold it leases, for reasons I can't explain, but you can't sell anything you lease as a general rule. Anything you lease you cannot sell, whether it's a car you can drive or an oil painting you can look at but, if you never take possession of the gold you're leasing (which I'm sure is the case), it has no worth, and cannot even be treated as an asset because you don't own it.

Basically if you lease gold, it will cost you money to lease it with no possible means to earn any income. The prospect of investing in gold may sound attractive but this method is the worst possible way to do it, as you won't benefit from any increase in value and you cannot earn any income. That is a bad investment.

If a company offers to 'lease' gold then it isn't required to be registered and regulated by the FCA because it isn't offering an investment, and that really is the point. It isn't an investment and can't be, because any increase or decrease in value doesn't accrue to the lessee. Because you pay for a lease (normally) and you don't have ownership of the gold there is no way to achieve an income.

'Leasing gold' can't be an investment by definition, and by design it can only cost money as it would if you leased a car. Of course if you lease a car you can drive it, or if you leased an oil painting you could look at it, neither of which is much use with gold, particularly if you never take possession of it.

… and along comes an example in news reports.

http://www.derbytelegraph.co.uk/Derbyshire-investors-lose-thousands-gold-scam/story-21344139-detail/story.html?

July 09, 2014

PRIVATE investors in Derbyshire have lost tens of thousands of pounds after falling prey to a gold-leasing scam.

Derby law firm Smith Partnership is acting for victims of a London-based company responsible for the financial sleight of hand.

The company accused of masterminding the crime is under investigation but Smith Partnership reports that independent financial advisers were also involved in selling the product, convincing clients to invest their savings and pension lump sums.

To all intents and purposes gold leasing doesn't exist as an investment for the general public, and that being the case, it should never be misrepresented as an investment (except between Central Banks and Bullion Banks as previously detailed).