Ten important tips before pledging gold? (Pt 1)

Before we pledge gold items, we need to be aware that the amount of money obtained is a loan that we need to return. If the gold price appreciates, we can consider performing ‘overlaps’ to get additional funds, but again, remember that this amount has to be returned in the future. Some might look at this as ‘passive income’ since they are getting money which is not true. Essentially, what has happened was that our loan amount has increased, and this amount has to be returned, eventually. Before pledging gold items for a quick loan, kindly take note of the following tips:

Select the ideal timing 

Usually, the timing which is ideal for gold pledging are as follow:

Ar-Rahnu manipulation technique

This would be ideal when the gold price has dropped drastically (about 8 - 10% from the current price point) to obtain funds to buy more gold items at a lower price point. This method is known as the Ar-Rahnu manipulation technique. The only thing to note is that the potential to lose is more apparent than its profit potential.

Rolling of business capital 

If there is a need for funds for business opportunities that can generate a return higher than 1.15% per month, then the gold pledging is worth performing.

Fund source for quick expense 

We need funds for a quick expense, but we must identify the source to return the loan funds to secure the gold items.

If we are not sure of the source of funds that will be utilised for repayment in future, it is highly recommended not to pursue gold pledging. It is not worth ‘sacrificing’ the gold items for expenses such as changing new curtains or replacing car sport rims. If the intention is already fixed for purposes other than business, then selling off the gold would be ideal or preparing the gold items to be auctioned.

Pledging is done based on the capital needed

As shown previously, the pledging margin for Ar-Rahnu is around 65% - 70%. For instance, if we need a fund of RM 6,500, we can potentially pledge gold items worth RM 10,000, not items worth RM 20,000. The common mistake observed is that people tend to commit bigger items which would incur higher fees (custodian fee) when the additional funds may not even be needed in the first place.

Pledge gold items separately 

If we are keen to make the reclaim process more affordable, consider pledging the gold items separately. If we have three pieces of gold items, pledge each item separately, resulting in three contracts. This would make our claims to be much easier in the future. If all three items are pledged at one go, it might be tricky if we face financial hurdles upon contract expiry.

The only downside is that we might need to wait a bit longer for the officer to process when we come forward with ten pledge contracts. Hence, we must be willing to wait until we complete our transactions.

Identify the lowest pledging cost

Every Ar-Rahnu centre practices separate policies depending on its management. Hence, we must identify the centre with the highest loan margin while incurring the lowest pledging cost. We might need to call the Ar-Rahnu offices to collect this info before visiting them. Hence, it is not easy to pinpoint one particular Ar-Rahnu office simply because the policy might get revised frequently at the back end.

As general information, the actual cost of pledging would be approximately 1.15% per month. This calculation is made based on the loan amount and not on gold value.

Set aside the custodian fee from the loan amount

Once we obtain the loan amount from the Ar-Rahnu officer, consider setting aside the custodian fee for six months in total. The reason is, if we are to extend the duration of pledging in future, we can proceed to do so. Paying off the custodian fee before reinitiating a new contract is the way to go.

This is useful especially if the profit potential from the intended use has yet to be realized. Or if the gold price has yet to appreciate to the targeted level via the Ar-Rahnu manipulation technique. To recap, this technique is approached when the gold price falls sharply. Plus the gold price is expected to appreciate its previous peak within the next couple of months.

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Your buddy on gold investing,

Naresh G