This comes a few months after another company operating under a similar business model, The Gold Label, was also placed on the list.
Business Times has covered a story on this last weekend. You can read it here:
Extracted from the article:
“Effectively, Genneva has sold investors a put option along with gold, charging them a premium for it, and sweetening that by sharing some of that premium at the end of the contract period of a month or three months.”
Some people may think along the same line. But actually, this put option thing will never work out.
Assume spot gold is at $1000 and Genneva quotes you a selling price of $1200. Factoring in a discount, you only pay $1180 and have the option of selling it back to them at $1200 in one month’s time.
What has happened is that you have paid $1000 for spot gold, and $180 for a one-month put option with an exercise price of $1200. Charging $180 for an option that has an intrinsic value of $200 just doesn’t make any sense. The price of this option should be more than $200 if you factor in the time value of the option.
If you can understand the logic of this, then you will know that the deal is too good to be true.
Because if it is feasible for Genneva (due to whatever trading strategy they have in the backend), then they would have sold a similar put option to financial institutions at a price much higher than $180. Why would they want to sell it to you and get only $180?