BuyBack commitment is not sustainable

Week 41.1 BuyBack commitment is not sustainable

One of the common questions people asked is “Is there any buy back guarantee?”

Some vendor do offer buy back policy. For me, I stick with my rule. No buyback. Sometimes, I will offer to buy back but it’s on case to case basis.

Let do some basic arithmetic to determine the scalability of such buy back scheme. This is not me, but I wish it is me. I’m not so kaya/rich lah. Nevertheless it is for you to think about it.

Premise 1: Precious Metal margin is very low, for simplicity of calculation let use the figure 2% nett profit margin.

In order to earn RM10,000/- per month at 2% nett profit margin, the vendor need to sell RM10,000/ 2% = RM500,000/- per month or RM6 million a year.

Premise 2: Amount of cash capital he had maybe RM250,000 with rolling of 2x a month. That make up, the sales of RM500,000/- per month.

Premise 3: Assume there is a big profit taking process RSI-14 > 70, many customer want to sell back to you. Very few are buying. Let said 12% of his annual customer sell back to him within 2 weeks period and only 2% of his customer is buying. He need to fork out a cash of 10% of annual sales which is RM600,000/- but his capital is only RM250,000.

Thus, in good times, buy back is not an issue. In fact it is encouraged as seller will and wanted to make more profit. In stress time (big profit taking, market cut-loss), he will not be able to buy back from you if he unable to sell back to his supplier. Suppose he able to sell back to his supplier, the pricing must included the freight charges, lower buy back price most likely at spot price.

In summary, there are only few institutions which can guarantee buyback

a)      Bullion vendor with hedging and buyback mechanism with the wholesale bullion vendors.

b)      Banks

c)      People with lot of cash