Malaysian Gold Plans Flourish as Savers Seek Higher Yield

Malaysian Gold Plans Flourish in Hunt for Yield
A shopper looks at a display of gold jewelry at a store in the 1 Utama shopping center in Petaling Jaya, Malaysia. Photographer: Goh Seng Chong/Bloomberg

Dadhyanna Tan Mian Lee ditched a 10-year career in telecommunications in 2009 to become a consultant with Genneva Malaysia Sdn., selling gold to customers with a plan that she says yielded as much as 24 percent a year.

“My mom would say, she got 3 percent per annum placing her money into a fixed-deposit facility with a bank,” said Tan, 38. Genneva also won her father as a customer with its offering of discretionary monthly “gifts” to purchasers of its product. That income source is at risk after Malaysian authorities raided Genneva and three other companies this month for suspected offences such as illegal deposit taking.

A search for better yields to beat the interest rates on bank deposits has boosted the appeal of alternative investments as diverse as stem-cell storage and birds’ nests, while unlicensed instruments in the Southeast Asian nation identified by the Securities Commission doubled to 25 in 2011. The central bank has refrained from cutting its benchmark rate since 2009, highlighting the risks of keeping borrowing costs too low, and authorities have moved to contain property prices and prevent asset bubbles.

“More people are willing to invest in such schemes,” Sujatha Sekhar Naik, the Securities Commission’s head of investor affairs and complaints, said last month before Genneva was raided, referring to the increase in interest in unlicensed investments. “They are becoming more sophisticated. They are following the development of society, the markets and what they’re doing is upping the ante in terms of the types of schemes they offer.”

Malaysian Raids

The Securities Commission doesn’t regulate gold investments. Genneva was raided by the Malaysian Police, the Ministry of Domestic Trade, Cooperatives and Consumerism, the Companies Commission and the central bank on Oct. 1, the authorities said in a statement, advising the public to be “cautious in investing their money to avoid becoming victims of activities that are illegal.” Four days later, raids were carried out on Pageantry Gold Bhd., Caesar Gold Sdn. and Worldwide Far East Bhd.

Genneva said in an Oct. 24 statement on its website that it would be “totally wrong” to say the company was engaged in illegal deposit taking. “Our legal advisers say for the time being we cannot have any comment on this,” Jamsen Lim, Genneva’s general manager, said when contacted by Bloomberg News.

Authorities will complete all investigations as quickly as possible, Bank Negara Malaysia Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur today. “We know that there are many anxious depositors and investors, so will expedite as fast as we can so that there will be an early conclusion,” she said.

‘Negative Impact’

Interest in unlicensed investments is on the rise because of low interest rates and the desire for higher returns as consumers seek to boost incomes, according to the Securities Commission’s Sujatha. The regulator warned against 25 unlicensed activities offered by individuals and companies last year, the second highest on record since 2003 and up from 13 questionable operations in 2010, according to data on its website.

The hunt for returns is suggested by investment and deposit movements. After the central bank cut its benchmark rate to a record-low 2 percent during the 2009 global recession, deposits growth slowed at the start of 2010 even as the expansion in nominal gross domestic product accelerated.

Net assets of Malaysian unit trusts have grown more than twice the pace of bank deposits in five of the last seven years, according to data from the central bank and Securities Commission.

“Lower interest rates will have a negative impact on deposit growth as investors search for higher-yielding assets,” said Ho Woei Chen, an economist at United Overseas Bank Limited Ltd. in Singapore. Still, the “current interest rate in Malaysia is not too low if you take into consideration inflation.” Higher property prices in Asia have also been caused by capital inflows and “stronger fundamentals” in the region, not solely low interest rates, she said.

Inflation Rate

Malaysia’s consumer prices rose 1.3 percent in September from a year earlier. The central bank’s benchmark rate is 3 percent. The average fixed deposit rate for a 12-month bank saving is 3.17 percent, according to data compiled by Bloomberg.

Still, Choo Chin Thye, a 50-year-old printing business owner, said he’s turning to stem cells and oil palm to get better returns than he can garner from deposits.

Since 2008, Choo has put 50,000 ringgit ($16,332) in a plan by Plentiful Gold-Class Bhd. that directs funds from investors into oil palm plantations. The move has earned him yearly returns of more than 8 percent since 2008, he said. He’s also helped design a plan to invest in stem cell storage equipment, which he says will offer annual fixed returns of 8 percent for the first five years after it commences.

Subprime Lesson

“I chose this because it has better yields,” said Choo, who lives in Kuala Lumpur. “With these schemes, the upside is technically unlimited.” He points to other ventures investors can turn to in Malaysia such as one involving rearing the swiftlets that produce birds’ nests, a popular Asian delicacy.

With lessons from the U.S. subprime crisis remaining in many policy makers’ minds, concern that keeping interest rates too low for too long will spur financial risks may have contributed to Zeti’s hesitation to join neighbors from China to South Korea in cutting borrowing costs this year even as the faltering world economy threatens growth.

“With the low interest rate environment, savers and investors are going to keep looking for other types of investments,” said Anthony Dass, chief economist at MIDF Amanah Investment Bank Bhd. “This will be one of the factors Bank Negara Malaysia will consider if it wants to cut interest rates.”

‘Normalizing’ Rates

Keeping interest rates too low for too long may lead to the “mispricing of risks” by those who anticipate borrowing costs will stay low, as well as create asset bubbles, Zeti said in March 2010, citing signs that people are buying higher-yielding assets “that pose significant risks.”

She has kept the overnight policy rate at 3 percent since raising it to that level in May 2011, even as neighbors from Thailand to the Philippines eased monetary policy. Bank Negara’s final decision for this year is due Nov 8. The authorities will keep rates unchanged until the second quarter of 2013 when a tightening is forecast, according to the majority of 19 economists in a Bloomberg News survey.

“At this point, it is a rate that provides some decent rate of return on savings and at the same time, it is a rate that provides access to financing by businesses at relatively reasonable costs,” Zeti said in an interview this month. “If you have interest rates that are too low, it provides the incentive to seek better rates of return, and then in terms of mispricing of risk, they go into ventures that are of higher risk. Well, we haven’t seen that.”

Property Curbs

Malaysia “normalized” interest rates in 2010 when the economy showed clear signs of recovery, becoming one of the first central banks to start raising rates to prevent the buildup of financial imbalances, Zeti said. Highlighting that rationale in its statements gave a signal for businesses and households that they should consider these risks, she said.

Concern consumers will take on excessive risk and spur asset bubbles prompted the central bank to tighten mortgage lending rules in 2010. Prime Minister Najib Razak raised the real property gains tax on short-term investments in his Sept. 28 budget speech this year.

The benchmark FTSE Bursa Malaysia KLCI Index has climbed more than 9 percent this year, according to data compiled by Bloomberg. Average condominium prices in the capital, Kuala Lumpur, have almost doubled since 2004 to 515,867 ringgit in the second quarter, according a government report.

There may be only so much policy makers can do to deter risky investments.

Genneva has more than 50,000 customers and a turnover of 3 billion ringgit, according to its website. The authorities said assets of the companies raided were seized and frozen to facilitate their investigation into the suspected offences and to protect the interest of the investors.

“It has brought about sleepless nights,” said Tan, who gave up her job with a phone company to become a consultant with Genneva after her father became a customer, saying she was attracted by the chance to learn about gold trading. The raid has “shaken our financial ability for the month,” she said.

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