Summary:
Singapore Precious Metals Exchange (SGPMX) claims to be the world’s first physical precious metals exchange that gives investors an online platform to buy and sell gold. Founder and CEO of SGMPX, Victor Foo, explains how the company aims to address all the problems that comes with owning physical precious metal: Where do you buy it? How do you move it? Where do you store it? And how do you trade it?
Transcript:
Melisa Idris:
Good morning. Today on the Breakfast Grille, we have Victor Foo, the Founder and CEO of Singapore Precious Metals Exchange, or SGPMX for short. Welcome Victor. Now you claim to be the world’s first physical precious metals exchange. In fact, you founded SGPMX in August 2011, and that was directly after the GFC. Now, did that have anything to do with why you started it?
Victor Foo:
I would say that the GFC taught me a lesson or two because personally being invested in certain financial products, I was not spared and obviously, I lost some money. Thanks to that, this basically was the catalyst of the idea of SGPMX. Because I felt that in the world today, there is no financial instrument or platform where either you’re an ultra-high net worth or man on the street, that you could invest on diversify part of your finances into an investment that has physical, tangible, intrinsic assets. So I always use the analogy of buying a house versus buying gold. Today, if you wanted to buy a house, it costs a lot of money anywhere in the world. And liquidity is an issue because if you bought any investments, liquidity is the most important. So if you sold the house today for cash, you don’t see your money three to six months down the road. Or if you buy a house today, it would take three to six months before you can take possession of the house.
Because of precious metals, it’s basically instantaneous. If I bought a kilo gold today–I paid for it, I take delivery of it. Likewise, the reverse. If I sold it today, I get back the kilo in dollars on the spot. This basically has instant quality. Two, it has a tangible or intrinsic value. Three, one could basically invest or liquidate in fractions. Because you couldn’t sell half a house or a third of your bedroom house. Whereas if I had 100 kilos of gold, I could accumulate a gram a day, or even so, a kilo a day. So this gives a whole new perspective to diversify your investments.
Melisa:
So when you were looking to start SGPMX, the price of gold was high. A record high, in fact. But it’s no longer trading at those levels. How has that impacted your business?
Victor:
After 2008 GFC, obviously the dollar has been rising despite all QEs. I personally feel it is mass manipulation. Of course, I may be biased that has driven gold prices down from the all time high of $2,009, all the way to $1,050.
Melisa:
What do you mean by mass manipulation, Victor?
Victor:
You see, the gold price today is not a physical price. The price mechanism is still a futures price. It’s physical gold yet to be delivered.
So if I want to drive prices down today, I just put in a bit of seed money. Have a bit of guts and ideally shot the market. If I shot enough contracts versus the long, prices will just drop tomorrow.
Whereas on our exchange, it’s different because we pride ourselves being the world’s first and only 100% backed by physical metals. Which means if I want to sell a contract or a kilo gold on the exchange today, I must first own the gold. The gold has to be, secondly, pre-certified that it’s real. Third, it is then stored in a neutral facility out of Changi, where we store our gold for our customers. Thus, the buyer will be assured that what he or she is buying, it’s already physically delivered, it’s authenticated, and is stored at a neutral ground. So on the flip side, if he or she wants to sell it the next day, he doesn’t need to take it home. He just click on the mouse–it gets sold.
Melisa:
You’ve just listed all the issues that come with owning physical gold and you identified this when you first started. You said ok, while physical gold is attractive to own, these are the reasons why more people don’t. And you’ve identified supply, storage, logistics, and liquidity–the trading of it. So those were the issues you aimed to resolve.
Victor:
Correct. So over the last couple of years we’ve built the infrastructure from scratch because the only way for us to be able to get the average Joe to come in, we must provide solutions and means to an end. So today we procure all our gold and silver directly from the international mints, coming from Switzerland, Germany, Canada, US, and Australia. These are the common brands that you see everywhere, and because it comes directly from the mint into our vault, which is also a third party. We store all the metals at Le Freeport, which is out of Changi Airport. This is a high security, state-of-the-art storage facility where it’s abundant warehouse. So the chain of integrity of the metals is not broken. We have all the paperwork to show that it was manufactured by the Swiss mint; it was shipped securely past customs into the bonded warehouse.
Melisa:
So that solves the issue of purity of the gold, right? You know that the gold is over certain purity.
Victor:
Correct.
Melisa:
OK. And then also resolves the security and storage issue. What about insurance of the gold?
Victor:
Because we have the chain of integrity. No insurance company is going to insure something that does have proof that it’s real.
We have the secure logistics. Because we work with all the International secure logistics companies that assured that there’s no transit where gold bars are swapped–that will never happen. Even it happens, we have subrogation.
Melisa:
Maybe in Hollywood movie.
Victor:
Another Italian job? So we have the channel integrity where we know that it’s authentic–it was it was made by a Swiss or German mint. It was securely transported. It is now securely stored. So because of these three elements, we are able to get full insurance or risk cover 24/7 out of our facilities.
So our customers are assured that other than the secure facilities, should something happen, there’s still the underlying insurance. Because it’s in a bonded warehouse, the whole facility is basically governed by Singapore Customs. Security is by Singapore police, you have these Civil Aviation board, and because it’s a bonded warehouse, there’s GST that’s been waived. So you still have Inland Revenue looking over your shoulder. And I take this as a very good third party governance, other than just us being there managing the metals on behalf of our customers. We are constantly governed by all these laws, which are third party.
Melisa:
Is that why you chose to be based in Singapore? Because Malaysia doesn’t offer this kind of services?
Victor:
That is one of the reasons why. Secondly, because of the international acceptance in terms of financial services. No doubt, gold is not the currency. But I felt that as a hub, Singapore was easier to sell in terms of the overall infrastructure. So I’m Malaysian, I’m proud to be Malaysian. And a Malaysian founded the Singapore Precious Metals Exchange.
Melisa:
Victor, we’ve discussed the procurement of gold, the logistics of transporting it, and also the storage aspects of owning precious metals. So let’s discuss now the other aspect–the trading platform.
Victor:
The final piece to the puzzle was the exchange. Because like any investment, is only as good as liquidity. In this exchange platform that we’ve created has attracted a different breed of investors. See, if I want to do a day trade to buy and sell to make 2%, I would go to a paper trading platform. Because I’m just in for a quick pound.
But if I want to have a more stable, robust, long-term environment, I would then choose SGPMX versus paper trade for two reasons. One, SGPMX is fully backed by gold. Whereas paper exchange is merely a contract.
Melisa:
Can you go into a little bit more detail there? I mean what exactly is the difference for investors who invest in gold futures instead of physical gold?
Victor:
When you invest in a contract, a contract is about 100 oz. You basically put 10% to buy that contract or you could even sell–an option which you collect premiums. Whereas here on a physical exchange, you are trading a physical commodity that is in your name. Because every single piece that is stored is allocated to each individual owner by serial numbers. So my bar is mine, yours is yours. There’s no sharing to the point you can visit us and we can even bring the bullion from the vault for you to…
Melisa:
Oh, so I can just come up to SGPMX and say, “I want to see my gold bullion! Show me now.”
Victor:
Or take delivery and take it home. Every month we have visitors from all over the world who come to Singapore for holiday, and they take a family photo portrait with some bullion, which is nice.
Melisa:
That’s a good holiday photo to go back with. But what about gold ETF’s? Just a quick look at SPDR gold trust. Now they’ve got assets of US$25 billion. Are you even comparable?
Victor:
OK. ETF, again, is a different platform, because most ETF’s are not 100% backed by physical. I would say most are probably between 5% to 10%, and the balance are still contracts. So again, I always say I’m biased because in a way, they are competition. But to me, a paper investment in gold is a totally different asset class compared to a physical offering like ours. It’s like buying a physical property versus buying a property stock.
Melisa:
I have to ask, Victor, what really is the underlying trust or confidence in gold? Because you know Warren Buffett hates gold. He says that, I’m just going to pull up the quote here, “Gold gets dug up from the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility,” he argues.
So what do you think is the underlying interest in gold?
Victor:
I guess you have to look at what context did he refer that to. He is right in every sense. As I said, traditionally, physical gold has been a preserver of wealth. I would say none of our customers come to us to make money. They come to us because they have made money elsewhere, and they want to make sure that the value of money that they have earned is maintained.
I have today brought, sadly the listeners can’t see this. I brought a gold coin which was given to me by my dad. It’s a 1971 MYR100 Bank Negara coin.
Melisa:
OK and it’s in size of say, MYR0.50 right.
Victor:
It’s pure gold. In 1971, one would have gone to Bank Negara, exchange that big purple coloured note.
Melisa:
Of MYR100?
Victor:
For this coin. A MYR100 then is still MYR100 ringgit today. Guess what’s the value of this coin today? The intrinsic value of this coin is half an ounce. Half an ounce is about 700 U.S. dollars. In today’s context is almost MYR3,000. So the last 45 years, has the gold price gone up? Or has the Ringgit devalued by 30 times?
So it’s obvious if I had MYR100 then, and MYR100 today, the purchasing power of the MYR100 has dwindled. Over the last 25 years in KL, how much has a bowl of noodle increase? Easily five times in the last 20 years. But what has changed in the context of the noodle is the same. So inflation is the cause of why everybody is working harder and harder looking for diversification.
Coming back to what Mr Buffet was saying, he’s looking at a context where gold does not give yield. You’re correct. Yes, it does not give yield but it basically preserves value. We have recently launched a program in Singapore through a tie up with a Singapore bank, where today if you have $1,000,000 worth of gold equivalent stored in our facility, you could actually pledge that physical gold to the bank for a loan to value up to 80%. Many of our customers have done that because they fear that their cash in the bank will continue to be dwindle–which will. Any bank account holding, just cash, without diversification, will lose half its value over 20 years because inflation, alright, first.
Secondly, if you have cash in the bank, the cash sits in the bank’s balance sheet. So if 2008 happens again and you have $1,000,000 in any bank, and that bank collapses, there goes your money. But if you converted that cash today, which is earning nothing, to even hedge against inflation. Convert that cash into gold. Most people will not do it because of the four problems–because authenticity, because of storage, because of liquidity. But we’ve basically come up all the solutions. So you convert your cash to gold that goes in the repository; you pledge that gold to the bank for 80% of the value. And the lending cost is just under 2%. So it’s cheaper for you now to spend the bank’s money for your daily use than to use your own money. And touch wood, if the bank collapses, that gold is still yours.
Melisa:
What do you see as the risks to owning physical gold? Not just the areas that we talked about in terms of supply and security and all that, but rather the risks to gold prices.
Victor:
If you look at the last five years, gold has come down almost half. Almost half from that high of $1,009 to at least $1,100 today. But I always believe in diversification. Don’t put all your eggs into one basket.
If you have a diversified portfolio, I’m looking at you juts focusing on your cash part to basically diversify part of your cash into a commodity like gold. You still have your houses, your bonds, your properties. By all means, do that. But your cash portion which is not earning anything in deposit might not look that good?
Melisa:
Do you think that what’s happening now with the global economy might impact or influence the way we view gold–the value of gold? I mean, just looking at central banks and their behavior. Does that impact gold demands?
Victor:
If you look at what’s happening around the world with all these geopolitical risks and certainties, traditionally people will come to gold as a refuge. So I would say a lot of traction coming along. Take the ringgit, for example–it’s devalued over the last ten months. And who knows, we’re looking at some signs of strengthening. But by diversifying your cash into gold is actually a natural hedge against devaluation.
So I will say this year we’re going to see a lot of traction. a lot people going to be attracted to a commodity like ours.
Melisa:
Is there always going to be a minimum demand for gold no matter what?
Victor:
You see, if you look at tradition, in Asia especially. Look at our forefathers, great, great grandfathers. Even in our Malaysian culture. Chinese always gives gold during festive season.
Melisa:
I think this cuts across all races right?
Victor:
Correct. So the answer is there will always be a basic value. But because of all these derivative structures, people have been blinded. People have basically moved away.
No doubt they know that they should have some basic intrinsic gold and silver at home. But because of all these new diversified instruments, people have basically deviated. But I would say in the coming months and the years to come, as you see cracks in the wall with all these structures, people will be driven back to basics again.
Melisa:
Well, based on the people who come to your trading website, where are you seeing the most traction coming from? Which geographical areas?
Victor:
Surprisingly, the United States is the fastest growing and that is about 60% of our customer base. US has been very mature market. So we never really bothered marketing there because the space was very crowded. But why we’ve seen a huge fraction because a lot of US citizens are now looking at moving their physical assets out of US. Because the law in US still allows the government to confiscate or to nationalize gold if they should suggest to do and that happened in the 1920s.
So other than that, our customers are looking at moving part of their physical assets because you can’t move a house. You can’t move property. Stock is still paper. So the only tangible asset that can move is basically, physical gold and silver.
Melisa:
What kind of trading volume do you see on your platform?
Victor:
Volumes are not as high compared to a paper exchange. As I mentioned, most, if not all our customers are now buying. Nobody is selling at this prices, because most of our customers would have procured their gold when gold was $1,500, $1,600, even some as high as $1,900. So those people have, instead of selling, have now opt for leveraging.
So people may need some mezzanine funding. So instead of fall, sell and lose money, they take the gold, pledge to the bank, use the money and diversify their portfolio.
Melisa:
How do you keep trade in your platform dynamic and robust?
Victor:
So what we do is we do a lot of matching like many exchanges. But I would say 90% of our customers are long. So our revenue model is not only on trading volumes, but rather on storage. It’s like asset under management because it’s physical. Don’t forget, it’s not a paper trade. So even if we have only 10% of our customers trading, 100% are still storing.
So regardless if we had even zero trades in the year, we will still have good revenue which is recurring, very important, year after year.
Melisa:
Because charge a fee for the storage. OK.
Victor:
And our charges for storage is very reasonable. It’s only half a percent per annum, which includes storage fees in a highly secure environment, is fully insured, and is a third party audit.
If you had a kilo of gold today, you couldn’t even buy insurance at home. You’d have to buy a vault, alarm systems, CCTV–so it costs more.
Melisa:
It’s a lot of investment.
Victor:
Correct.
Melisa:
Jim Rogers, the renowned investor, was the first person to complete a transaction. How did that happen?
Victor:
Just going back a couple years ago before the exchange was fully structured, I basically approached him and he became a customer.
Melisa:
So have you had to convince people of the security and the underlying investment of investing in physical gold?
Victor:
I would say for us the most challenging part is not of the convincing of our infrastructure. I think the way that we are structured is very robust. It’s fully governed and customers are convinced.
I would say the biggest hurdle is the educating part. Because traditionally, nobody wakes up in the morning, oh, I think I should buy some gold today. Or I think I should buy some precious metals.” I may wake up and say, “I’ve been eyeing for that Cartier ring or that necklace or five carat ring for the last five years”. It’s not normal for people to basically diversify their money into precious metals.
So we’ve come up with a lot of initiatives. I call it products, it’s still gold and silver. For example, we launched a gold savings accumulation program a couple years ago where even a kid could buy 10 grams of silver. Today 10 grams of silver is just under US$10.
Melisa:
Before this, you had a minimum investment amount?
Victor:
Yes. For one to trade on the exchange is only US$1,000 per trade. Versus what SGX is having, it’s 25 kilo of gold. So $1,000 can basically reach to the masses. But at the same time, we wanted to be able to facilitate to the masses as well. So the accumulation program allows you to sign up through a standing instruction, where you could buy in multiples of 10 grams of silver every month, or even one gram of gold. Today, a gram of gold is just under US$40, which is affordable. If you go to any bank today with MYR150, what could you invest? What could you buy? There’s nothing. I think some banks won’t even allow you to open a bank account.
Melisa:
So what do you have planned next for SGPMX?
Victor:
Our long-term goal is basically to launch one day our own SGPMX price discovery. What do I mean by that? Once we have enough traction–enough people trading, storing on the exchange, we will then go to the members and say, today COMEX is trading at $1,100. We want to have our own physical backed price discovery at 11%, 10% higher than the market. Nobody is going to say no. Because it’s a physical price, our price does not need to change. A kilo of gold today is a kilo tomorrow. But because COMEX will be volatile, they will move by itself. As long as we are 10% higher, for example, there will always be an arbitrage. But if COMEX drops by 20%, that doesn’t mean that we have to drop.
So slowly but surely, you see an emancipation between the physical prices and the paper prices. That’s where we are working towards. That’s why we’re looking at getting more people onboard.
Melisa:
So what would you need to facilitate that aim? To increase resources, I assume. What kind of infrastructure would you need for that infrastructure?
Victor:
Infrastructure will be exactly the same–we have all the capacities now. What we need is basically more people, more physical to be stored. Because once you have enough people, let’s say 100 tons. I think we’ll be ready to launch that very soon.
Melisa:
I’ve been speaking to Victor Foo, the Founder and CEO of Singapore Precious Metals Exchange or SGPMX for short. Victor, has been such a pleasure speaking with you today.
Victor:
Thank you, Melisa. Thanks for having me.
Melisa:
I’m Melissa Idris for BFM 89.9 the business station.
Source: BFM 89.9, The Breakfast Grille, February 24, 2016