Sunday, 30 October 2011

Gold investors: support competitive pawnshops

Sweeping reports on the global gold market can be too slick for investors like me to get their heads around. But I want my gold exchange traded fund investment (PHAU) to have a foundation in something that I can see for myself. This might be an unrealistic aim but I'm trying.

So far...

When I checked my local gold market on the Narroway in Hackney Central the pawnbrokers offered better prices for scrap gold than the jewellers.

That was all I could squeeze out of my first aimless mission. Then a foray south into Tower Hamlets found muslim gold owners breaking their religious code to pawn their gold.

What next?
If my local gold market is dominated by pawnshops are they offering a good deal? A possible lead came from the BBC report on the gold buying season in India by Delhi reporter, Mark Dummett, for BBC Radio 4's The World Tonight.

Dummett talked about the big business of lending against gold in India and one successful example of a company that does it: Muthoot Finance.

Muthoot, which listed on the Bombay Stock Exchange in May, also opened its first store in the UK last year in the heart of London's Indian community in Southall, in west London. In the UK it charges interest rates between 5.99% per month (for loans between £20 and £199) up to 2.5% (for loans above £3000).

Taken at face value these rates look far better than the 8% per month offered by pawnshops in most other UK high streets.

That's what I was offered at a Money Shop in Bethnal Green - (I couldn't find the rate on its website) and it's the going rate at H&T, a publicly listed UK pawnbroker which explained the deal in its full year results published in March 2011.

H&T said that 95% of the collateral for its loans was gold jewellery, precious metals and/or diamonds. It said: "The pawnbroking contract is a six month credit agreement bearing a monthly average interest rate of 8%."

It also said that if a customer "does not redeem the goods by repaying the secured loan before the end of the contract" it will "dispose of the goods either through public auctions... or the Retail or Scrap activities of the Group."

Since last year there seems to have been a monumental rise in the amount of people failing to collect their items. The group reported scrap profits from "items forfeited from the Group's pledge book contributed £9.0 million (to profits) in 2010" compared to £2.1 million in 2009. However I'm not sure if those figures should be taken at face value (there was some kind of technical postscript).

This looks interesting. My guess is that most of this reclaimed gold will not be recycled as jewellery in the current climate because there are too few buyers (that's what Hackney jewellers were saying).

So what happens to this gold? Does it re-enter the financial system where investors like me buy and sell depending on the price but have no real demand or desire for the metal itself?

May be it would be better for gold investors if people who owned it kept hold of it - even if it remains in a pawnshop's safe. That's not likely to happen while loan rates remain so high. The double disadvantage for anyone pawning their jewellery is that they only get scrap value (weight) and if they want to replace it they'll have to pay the premium for craftsmanship as well as the spread on the gold price.

Before getting too excited about the Indian invasion this isn't a massively well researched piece and although I've put in some questions to the companies mentioned, none have got back to me.

Back to the slippery global picture, the current high price of gold is not expected to deter Indian retail buyers (the biggest demand for gold).

But some Indians think gold loan firms like Muthoot are selling their deals too hard and I haven't checked what the rate of 'forfeit' is for Muthoot - although a lower loan rate is likely to help.

ETF relevance?

I need to get a picture of how important the scrap market is to the global price. In its 2010 Gold Survey analysts at GFMS, a precious metals research agency, said there were three sources of supply in the global gold market.

The first was mining which accounted for 2,572 tonnes in 2009 and the second was scrap at 1,674 tonnes (39% of total supply) with central bank third and only accounting for 41 tonnes.

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".

The question is how much of the "unwanted jewellery" was really unwanted and whether that supply would have been less if consumers were offered better deals?

Cashing in on gold loans to muslims in East London?

Jewellery shops on Whitechapel Road, Tower Hamlets, East London.

The quest to connect with my gold ETF investment led south from Hackney into Tower Hamlets. Why? Because on Wednesday I heard a report on the BBC about gold in India in which the reporter said gold was in the DNA of indians.

I noticed the journalist had also reported on people panning for gold in the sewers of Dhaka, the capital of Bangladesh.

I wondered if gold was in the DNA of Bangladeshis too and London's highest concentration of Bangladeshis is just a short cycle ride south of Hackney. May be they had a more interesting gold market there.

Inside UKAY Jewellers on Whitechapel Road I was offered £38 for my signet ring (Hackney Jewellers offered between £30 and £40 so nothing special there).

A visit to Bombay Jewellers proved fruitless as they didn't deal in anything less than 22 carat gold.

I asked both if there were any Bangladeshi pawnshops - in Hackney they tended to offer better deals. Both said no adding that Muslims don't pay interest and so they don't run pawnshops or offer loans. I'd forgotten that Muslims don't do interest! It's not halal.

But somebody in Whitechapel must be using pawnshops - a new one was being built two shops up from UKAY (It was Fish Brothers, picture below, which has a branch in Hackney.)

Had I known there was a Money Shop on Whitechapel High Street I'd have asked them. It's right opposite the East London Mosque (For the latest on East End politics you could start here: Trial by Jeory)

Instead I dropped in on the Bethnal Green Road branch where they offered me £45 for the ring (much better than the jewellers). The woman behind the counter was happy to chat and said that she had served a number of Bangladeshi women, usually pawning their wedding jewellery.

I asked if they had been able to reclaim it, she said generally yes, they had. She also said that an interest rate on a loan backed by my signet ring would have cost me just under 8% a month.

The moral of the story?

Hopefully families that are put in a position where they need to pawn jewellery aren't doubly stigmatised by Islamic law. They probably are but I don't imagine it would take much imagination to neutralise the unacceptable interest rate and may be charge a storage cost instead.

It seems that there all sorts of options allowed under islamic law that could easily be applied to pawnshops and give Muslims access without breaking their religious code.

Hopefully a loophole will be found in this lot before the financial crisis drags poorer gold owning muslims into a gold loan dilemma.

That's not to say that taking gold to a pawn shop is good idea. It's not a cheap way to borrow money and that's what I'll look at next.

Anything to do with a gold ETF?

May be not yet.

Gold ETF Investor market report: 24-28 October 2011

As most commentators have pointed out, last week's eurozone rescue package (BBC explanation) coincided with gold prices rising again. The interesting point being that gold moved in the opposite direction to shares: on Friday the FTSE 100 closed down 0.35% while ETFS Physical Gold (PHAU) gained 0.84%. (Google Chart)

The big picture reasons were discussed in a Wall Street Journal piece in which the vice president at RBC Capital Markets said the eurozone plan involved printing lots more money and so it was an "inflationary rally" (if there's more money around then prices will rise).

Similar observations were made by a contributor to Mineweb but with a different spin: "We do not think that is the reason why gold and silver are rising... We need the ship to be made seaworthy. There is no sign of the political or financial will to do that. This continuing lack of confidence and uncertainty is a far greater contributor to the rising gold price than anything else."