Sunday, 20 November 2011

Pawnshops vs Gold ETFs: World Gold Council project?


Management at the highstreet pawnbroker Albermarle and Bond have told shareholders the company had a good start to the year and that this had continued into October.

The chart above (click to enlarge) shows the performance of two AIM (Alternative Investment Market) quoted pawnbrokers - H&T (Harvey and Thompson) and Albermarle and Bond - alongside the performance of the ETFS physical gold ETF (PHAU) Google Chart. It shows their share prices have under performed the dollar denominated gold ETF.

Despite the business model of these businesses becoming increasingly linked to the gold price the share prices aren't keeping up - probably due to nervousness around all small companies as the eurozone crisis continues.

This blog's attempts to get to grips with a gold ETF investment led to a number of trips into Hackney pawnbrokers, including Albermarle and Bond. While these pawnshops offer better deals on gold than most jewellers which buy gold - the seller hardly gets a good deal (pawnshops vs ETFs on price).

As far as I can tell pawnshops still prey mainly on poor people - amplifying their problems rather than solving them. (According to pawnbroker H&T, pawn shops are also increasingly used by the middle classes:Pawnbroker note rise in 'middle class' customers.)

Hackney in London, where I live, is full of pawnshops and betting shops. Neither are symbols of a healthy community.

Meanwhile the deals on offer in the UK appear to be worse than those offered in India by India's largest gold pawnbroker, Mathoots. The firm recently opened a store in the South London and the deal it offers is better than most UK pawnbrokers.

May be there's an opportunity here for the World Gold Council to do something useful. The organisation, which is financed by the world's gold miners, has a mission statement to "increase and sustain demand for gold."

The investment side of this has included creating the incredibly successful gold ETFs and now it also supports gold accounts like bullionVault.

But these innovations are for people whose gold ownership is a wealth preserver. Could it do something useful for people who are dealing in gold out of desperation?

It's a selfish argument for some one who owns gold, but it seems pretty obvious that fairer pawn shops would enable more people to maintain ownership.

And if poor people didn't have to sell their gold - often wedding jewellery - at knock down rates only for it to be melted down and sold to investors - the price of gold might be more stable.

(Telegraph story: Pawnbroker thrives in downturn, has interesting comments)

H&T reported a huge rise in the number of people who failed to pay back loans, thus forsaking their jewellery. At the same time this blog found out that Muslims in East London, who are forbidden from paying interest, have been using pawnbrokers, often putting their wedding gold at risk in doing so.

Not only will a pawnshop not take into consideration craftsmanship (even though they sometimes re-sell jewellery) but even the scrap value is highly favourable to the pawnshop.

Then, when a person wants to replace their jewellery they have to pay a huge premium for craftsmanship again.

Surely more people would own gold and trust it if there were fairer ways for them to borrow against it and benefit from its investment value when they need it. Instead pawnshops buy up their jewellery, melt it down and sell it. This, according to precious metals analysts GFMS, was a significant supply of gold last year, and, as such, will have helped keep its price down.

GFMS analysts said that the supply of scrap gold increased significantly in 2009 in North America and Europe. "Much of this growth was a result of heavy promotion by an improving network of scrap collectors, who made great use of consumer's need to sell unwanted jewellery to raise cash in a challenging economic environment." Read H&T's results to see how they cashed in on this with their "gold bars".

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