The Ecstasy of Gold by Ashek Ishtiak Haq Just like Pied Piper Led rats through the streets

We dance like marionettes Swaying to the Symphony of Destruction. Megadeth Mackennas Gold (1969) the great western film tells the story about a hidden canyon full of gold and how the lure of it corrupts a diverse group of people. It appears that a sequel of this famous western is in production right now in Bangladesh. A multilevel marketing company called Unipay2U with its own cleverly crafted spiral of greed is enticing innocent and dim-witted investors to their ruins. They have products ranging between $65, $120, $260 and $520 offering a whopping return of 10% per month and an opportunity to double the money in 10 months. The return; according to them is backed by Gold and the continuous appreciation of its price. The money that will be invested will be used to make investment in gold bullion stored in London, Zurich and New York. To sweeten up the deal they will also offer 10% of the deposit money per new recruits to the invitee investor. Just like the song mentioned above swarms of investors jumped into this bandwagon with a minimum investment of BDT 21,000 per account. So far 300,000 investors; has invested BDT 630 crore with of which the company. Out of this they have earmarked BDT 136 crore as account opening fees for themselves. One may wonder has any of this 300,000 poor souls have bothered to find out whether such return can be possible from Gold trade. The data to verify the claim has always been there; in an impressive, easy to find and analyze website of the World Gold Council (http://www.gold.org/investment/statistics/). Here is a summary of the gold return: Time line Jan 1971 - Dec, 2010 Nov 2009 - Dec, 2010 Jan 2010 - Dec, 2010
Source:

Average Monthly Return .89% 2.12% 1.81%

Average 10 Month Return 9.6% 21.6% 24.05

Average Yearly return 11.98% 25.2% 28.2%

Avg Monthly Return Jan, Avg Monthly Return Nov Avg Monthly Return Jan,
The monthly, 10 monthly and yearly returns have been calculated for three different periods (i) from the beginning of time from which data are available (1971), (ii) from when Unipay2U has started its operation in Bangladesh and (iii) for the year 2010. The first column tells the story about the monthly return and it is apparent -on an average- Unipay2 will not be able to meet the return. In last 40 years there are only 21 incidents on which gold has registered monthly growth over 10% and more interestingly only twice in the last decade the company would have got the opportunity to keep their promised return (jan,08 and Feb,09). The promised return of 100% basing on 10 monthly average is also impossible. The

maximum they can do is 24.05% (basing on last 10 months data). However this phenomenon has happened twice in the last 4 decades albeit 30 years (Jan and Feb of 1980) ago largely due to Soviet intervention in Afghanistan as well as the impact of the Iranian revolution which prompted investors to heavily buy the metal. Now comes the tricky part. An extremely crafty active investor who can predict all the peaks and dips will he able to give a return of 100% in 10 months (he has to pay BDT 10 per month on a BDT 100 investment)? Lets build a model with the assumption of no transaction cost, no external financing, cost of capital of 7% and a time period between November09 (the month when Unipay2u launched itself in BD) and December10. If he can take the opportunity to sell at the peak of the market and buy at the bottom (a feat that is only possible theoretically and if it really happens; it will launch a probe from the security and exchange commission). The daily trading data between Nov09 and Dec10 suggests that the fund will default in its payment by April, 2010 and in absence of any external financing it will start to pay from its capital. So it is obvious that even during one of the best Bull Run in the history of gold trading and with the most optimistic model the fund will fail to keep its promise. The only way that it will continue to operate is by capital erosion (or by paying the public their own money). What the firm is undertaking resembles a Ponzi or Pyramid Scheme (named after Charles Ponzi who notoriously used the scheme in 1920 to swindle USD 160 mn- in todays term- out of US investors). According to the wikipedia A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. In fact many critics have charged that Multilevel Marketing businesses are nothing more than Pyramid Schemes. Though MLM businesses are operational in the United State but the Federal Trade Commission (FTC) has clearly issued warning against them saying "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people - except perhaps those at the very top of the pyramid - end up empty-handed." An alarmingly low number of people come out of these schemes making any money. For example in order to provide suitable income for a 1,000 people an MLM company will need 1 mn people to come under their network. Research on the subject suggests that approximately 99.9%; of participants lose money after subtracting all expenses, including purchases from the company. Add some suggestion to Regulators Like ban any offer provide return more than XX%... Ensure warning to common people, all MLM marketing company should give adequate warning to the customers. ..bla bla..Gorden Grekko the antagonist in the Academy Award winning movie The Wall Street said Greed, for lack of a better word, is good. Grekko at the end of the movie was served with an eight year long prison sentence for committing insider trading and financial fraud. Unfortunately the real life Grekkos of Bangladesh only escape any public prosecution but also continue to entrap the low-paid service holder, the unemployed youth, the pensioners, the housewives, the dotting mothers. What makes the situation heartbreaking is these are the persons who can least afford to lose their money.

Ashek Ishtiak Haq an analyst with an MBA from the IBA in Dhaka University and is currently enrolled for the Level 2 exam of CFA. He can be reached at ashanto123@yahoo.com.