Tips for performing Ar-Rahnu manipulation safely

To start off, many of us are curious about how to utilise Ar-Rahnu to our advantage. Honestly, there is no magic formula in this service. Ar-Rahnu is essentially a loan program with gold items as collateral. The fees incurred is approximately 1.15% per month which translates to 14% per annum. It is a pretty high-cost loan service but slightly better than a credit card.

Depends primarily on the strategy

The profit realized from Ar-Rahnu services is dependent on how we strategically leverage the loan amount. If we use the loan to buy gold items, the party that profits from this pledging technique are the gold seller encouraging the buyers to apply for an Ar-Rahnu loan. The gold sellers earn massive commissions from the sales volume, while gold buyers are stuck with the commitment to pay back the loan within the stipulated duration. In this case, the profit potential is little in comparison to the loss potential.

Ar-Rahnu as a busines model?

The gold sellers might even acknowledge saying that ‘Ar-Rahnu is a type of ‘business’ because that is indeed true from their point of view. In a sense, they encourage gold buyers to pledge gold and use the loan money to buy more gold. Doing so, they earn commission from sales volume and their margin. The buyers have to deal with the loan, and failing to make full payment would give rise to their names getting black-listed.

From the experiences dealing with business people, they typically do not play this Ar-Rahnu ‘game’. They will only utilise this service to generate profit potential from the loan amount. In other words, they do not buy gold and repeatedly pledge to earn passive income as hyped up by irresponsible people.

The profit with the Ar-Rahnu manipulation technique

Here, the question is, how do we profit using this strategy?

It should be noted that prior to 2012, this method was highly discussed as ‘Ar-Rahnu manipulation technique’. Interestingly, the gold price was increasing steadily during this time. With this method, the end game is to increase our gold amount by using the loan. Hence, profit is only possible when the gold price appreciates covering the gold pledging costs. Gold owners can therefore benefit in two ways:

1. The capital gain of the original batch of gold items which are pledged for the loan (under the care of the Ar-Rahnu centre)
2. Profit from the gold price appreciation on the second batch, which was bought using the loan amount

Here we profit when the gold price appreciates. On the contrary, if the gold price crashes, it is not too bad either because we could use the loan amount and buy gold at a lower price. It is indeed a 2-in-1 strategy.

Actual cost of Ar-Rahnu manipulation

The trick here is that the observed gold price appreciation must cover the two levels of ‘manipulation costs’ incurred. And this must take place within the pledge duration of about 6 - 12 months. If the gold price does not sufficiently appreciate to cover these two costs, the profit potential is very slim to realise. So, what are the manipulation costs I am referring to? Let’s find out:

1. Spread margin of the gold items purchased using the loan money. For illustration, let us assume that we buy gold items of a 6% spread margin.
2. Safekeeping fee by the Ar-Rahnu office. The cost can be approximately 1.15% per month. The longer we keep the gold items, the higher the final cost. These charges can differ depending on the actual Ar-Rahnu offices.

Loss potential more than profit?

Next, let us do a hypothetical calculation to get an overview of the overall costs incurred while doing this strategy.

Following this, we can see that the actual cost increases every month. In the first month, the total manipulation cost is 7.15%, and this amount could go up to 12.90% in the 6th month. Using this as an example, let’s say the gold price appreciated by 15% by the end of the 6th month; what would be our profit potential? The calculation is 15 - 12.90 = 2.1%, and this is possible when we sell off the gold items in our hands and use the proceeds to reclaim our gold items from the Ar-Rahnu office.

To put it simply,

In other words, if the loan amount is RM 10,000, the profit potential is RM 210, excluding the capital gain of the gold items which we reclaim earlier. However, if the gold price appreciates by 8%, could you guess the profit potential this time? It is no longer a profit but a loss of 4.90% (8 - 12.90) or RM 490 (for RM10,000 loan amount). What if the gold price drops by 5% during this time point? This would mean that the loss realised would be by 17.90% (-5 - 12.90) or RM 1790 (for RM10,000 loan amount).

Let’s put all these numbers in the table for better comparison, shall we?

From the numbers in the table, we can see clearly how this method can be susceptible to gold price movement, which translates to either profit or loss potentials. The profit that we might obtain does not justify pursuing this method. Hence, we must be cautious in analysing this method before deciding to work on this. If you can sleep peacefully at night after doing this method, then perhaps you could go ahead with it. If not, my suggestion is to stay away.

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Your buddy on gold investing,

Naresh G