How do we use gold as capital for quick expense?
There is a category of gold savers where they utilize gold as a quick fund source to cater to their interests. If we need cash to get ourselves some exciting products, our gold savings can be pawned for money which we can then use to buy the item.
For instance, let’s say we need SGD800 to get ourselves a new mobile phone. One way to fund this activity is by pledging our gold at Ar-Rahnu centre and using the money obtained to buy the mobile phone. During the duration which we agreed upon during the process (typically six months), we pay back the amount, including the safekeeping fee, until completion and re-claim our gold item back. We have essentially settled the payment and got ourselves the new mobile phone.
The question is, does the method described above worth the effort? This is something for us to think through before deciding.
I do agree that pawning gold items gives us quick access to cash. But based on the safekeeping fee of 1% per month (as a rough calculation), the annual charge incurred is equivalent to 12%. Using the same example earlier, we spend an extra 12% on fees to fulfill our wish (owning a brand-new phone).
Spending is fantastic, only after you save for it
A better way is always by planning our budget for our future purchases. After understanding the budget, we discipline ourselves to allocate the amount every month until we hit the target. The underlying principle here is the expenses should take place after saving the actual budget required. By doing so, the need to pay extra in terms of fees is no longer needed. This method is cost-effective and ideal.
In addition, when the gold items are kept at Ar-Rahnu centre, our mind would work hard to do whatever it takes to claim the said gold items. The priority would be settling the loan payments before utilizing the funds for other expenses. As a result, both the gold item and phone would be in our hands. Though this is good to pursue, they still lose due to safekeeping fees, mathematically. Nevertheless, from a psychological standpoint, they made a profit.
Making profit psychologically
When we think about it again, the fact that gold is used for capital is a way of ‘making expense from our savings.’ It is just that the savings are in gold rather than cash. We all know what would happen if we had it in cash, am I right? One way or the other, we would spend that money elsewhere, and when we are tight on budget, we would then resort to a credit card or, worst case, taking personal loans. Therefore, saving in gold can help us when we need quick cash.
Nevertheless, those who wish to pursue this route must know where we could pledge the gold and get to know the associated terms and conditions, such as the fees involved and duration. Failing to claim our gold items would cause our items to be auctioned off, which we need to avoid.
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Your buddy on gold investing,
Naresh G