Barring a miracle
The economy might still be limping along but at least gold traders are making a mint. EN discovers how the inflation of a bubble is spawning a glut of new businesses.
Once upon a time the high street was a simple place. Customers, by and large, went to shops to buy things. And shopkeepers put most of their efforts into selling them their wares.
Visit any British town centre nowadays, though, and one of the first things to strike you will be the posters in jewellers’ windows.
Many independent jewellers have always bought second-hand jewellery and/or operated as pawn brokers but now even the national chains are at it – they want to buy your gold.
While gold bought at its current price is made more valuable by the jeweller’s craft the opposite is in many cases true for second-hand items. Thanks to the remarkable escalation in the global price of the precious metal, from US$250 per troy ounce (the market’s favoured measure) at the turn of the millennium to around $1,100 now, many of its derivative products are now worth more for scrap than their original cost a few years ago. So jewellers are now keen to buy the stuff they were selling five years ago, melt it down and flog it to investors.
A sure sign of a bubble, you would think. And you’d doubtless be right. The price rose more or less steadily (there was a mini boom in 2006) up to the beginning of the credit crunch in mid 2007, when it began heading for the stratosphere.
It crashed again in autumn 2008, along with every other asset, to less than $700 per troy ounce, before the shiny stuff reasserted its grip on investors looking for a “safe haven” and it began its rapid rise toward its recent high of more than $1,200.
And businesses have been popping up left, right and centre to take advantage. Bubbles in consumer commodities only come along occasionally. While things that actually have extensive industrial uses – copper for instance – enjoy occasional prolonged periods of abnormally high prices, it’s difficult to see how the average Joe can either set themselves up as a middleman or, having done so, access enough of these materials to make any money from processing it or establish a route to the wholesale markets to sell the relatively small quantities they will be able to source.
Not so gold. The first indication of what is happening came, for those of us who work for a living, while searching in vain for a Bond film at Christmas. The Man with the Golden Gun might have been absent from the TV schedules but you were hardpushed to find a channel that wasn’t advertising Gold Buyer Man or one of his many competitors.
This phenomenon, like so many, originated in the US. The model is simple – request one of their special prepaid envelopes, seal your unwanted gold inside, send it off and the company will then make you an offer. If you accept, you get a cheque and your gold is melted down for bullion. A number of postal operators have come under attack in the press for the rates they pay to consumers and the implied consent they draw from a lack of response to offer letters within a given time period. The companies, however, tend to point to the expenses they incur in terms of registered postage to justify the prices they pay.
The OFT is looking into such firms’ terms of businessand a recent Which? Magazine investigation found that postal gold-buying firms paid on average just six per cent of the retail value of new items received, while high street shops offered 25 per cent.
This seems shocking but is also a little unfair – the firms in question aren’t buying a finelycrafted new gold necklace to sell as a finely-crafted gold necklace made with raw materials at today’s prices but to melt down and sell as bullion. And the prices being offered per gram as a percentage of the raw material’s market value are more impressive: although in some cases they still allegedly pay out as little as 20 per cent of the item’s value on this measure it is often rather more.
Some alleged sharp practices aside, sellers can theoretically take or leave any offer. And this is certainly true of the high street jewellers and pawnbrokers who, as previously noted, are also rushing to get in on their act. Similarly, in a twist on the Tupperware or Ann Summers party, suburban housewives are now to be found visiting neighbours to get their unwanted jewellery weighed and a cheque handed over.
American commodities trader Krista Waddell founded the Gold2Green party concept in Las Vegas in January 2008, expanding into the UK as Ounces2Pounds in November of that year. She says her firm pays 60-90 per cent of the market value of items – the greater the volume bought from each partygoer, the higher the price her company will pay.
The most obvious thing about the gold buying phenomenon is that it was made possible by the coincidence of economic recession with an inflated price for a non-essential asset that many people have in small quantities.
Waddell, however, tells us that for her client base of not-sodesperate housewives it’s about making extra pocket money, not selling Grannie’s brooch to feed the kids.
“Our market isn’t in need of money,” she tells EN. “We offer a completely different product to the postal operators – and we offer higher prices because our employees are sitting there right in front of them. They would be embarrassed to offer less.”
Newspaper stories have concentrated on the “rip-off” allegations against some of the postal operators. However, arguably the real mugs are those on the other side of the transaction – the investors piling into a commodity with little intrinsic worth but which is touted by all-and-sundry as a “repository of value”.
And new ways for retail investors to get in on the gold investing act have been popping up. One that launched five yearsago and can’t be said just to have jumped on the bandwagon is Bullion Vault. Its head of research, Adrian Ash, says that while Western monetary policy leads to such slack returns on cash and bonds money will continue to pile into gold.
Ash also points to gold’s popularity in emerging markets: “The Reserve Bank of India made headlines –and a 17 per cent rise in gold prices – with its decision to buy 200 tonnes of gold from the IMF in November. The People’s Bank of China has been quietly building its reserves all decade, and Russia overtook the Netherlands in December as the world’s sixth-largest hoarder.
“Long-term planners in both Beijing and Moscow will be wise to history’s golden rule – ‘He who has the gold makes the rules’as Bretton Woods proved – but the real story going into 2010 is China’s private demand. Over the last five years Chinese households bought four times as much gold as the PBoC bought between 2003 and 2009 – a massive 1,775 tonnes, which is equal to more than two per cent of China’s famously huge personal savings.”
It is, of course, unthinkable that the Chinese savings glut could contribute to the inflation of a bubble! A recent slight falling off notwithstanding, we are likely to see what George Soros described at the recent Davos economic summit as the “ultimate bubble” inflate a fair bit further.
The sign that any asset price is overvalued comes when retail investors start to get in on the act. So the fact that criminals are now reportedly turning houses over for their jewellery and leaving the plasma screens in situ should set more than just burglar alarm bells ringing.
But until income-generating assets – company shares and bonds – start generating more income you can bet that a growing horde will somehow convince themselves that a chunk of metal trading at four or five times its recent value is somehow safer than a FTSE100 tracker fund trading, in price-earnings terms, at around its historical average and which, even in the 2008-09 crash, lost less than half its face value.
So when will it all go wrong for gold? We wouldn’t be sat here if we could pick that one but when your mate’s gran stops selling herold earrings to pay for the heating and starts buying new ones “as an investment” it might be time to think about getting out.
Disclaimer: the above article is an opinion and does not in any way constitute investment advice. The value of investments can fall as well as rise, and rise as well as fall.
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