Florida Avenue is the main drag in our little town in central Florida. In less than a mile, you're likely to see three or four folks standing on the sidewalk wearing headphones, bopping to music, and waving big glittery signs or arrows with “We Buy Gold” written across them. It's a common sight across many cities today.
During my annual trip to Arizona, my friend Phil asked me about gold. He owns some gold with no emotional value tied to it, and I convinced him of two things. First, he should not sell his gold; and second, he should hold it in a portable form with an easily recognizable value, like Gold Eagles. If things really get tough, he wouldn't want to have to barter jewelry with no easily agreed-upon value.
There are many places where he could probably sell his jewelry, but how would he know if he was getting a fair price? I didn't know either, but I knew I had a friend who would.
I called up my good friend Rob. His family has owned a pawnshop for decades; it even has a “We Buy Gold” sign in the window. Who better to ask?
Rob explained his position as a dealer. For him, gold is a highly volatile asset; its price swings can have a major impact on his margins. When he buys gold, he must hold it – sometimes for several months – until he has enough to sell to a refinery. His highest percentage payout at the refinery is tied to the volume he sells.
Under Florida law, even if he buys the gold outright, as opposed to taking a pawn, he's required to hold the item for at least 30 days. The normal “We Buy Gold” facilities have a 15-day minimum hold.
When the price of gold is rising, a lot of folks come into his store to sell. When it drops, Rob can get caught with inventory he can't sell at a profit. The dealer does take a sizeable risk.
Rob walked me through the process his clerks use to evaluate gold, using a necklace as an example.
First they put the item on a scale to weigh it. Most dealers weigh the item in “pennyweight,” not ounces. One pennyweight is 1/20 of a Troy ounce.
I asked Rob, “If I weighed a gold necklace on my wife's Weight Watcher's scale and it weighed 1 oz., that's 20 pennyweight on your scale, right?”
He replied, “Not exactly.”
A Troy ounce is not the same unit of measurement as the “ounce” on a postal scale or the scale you weigh yourself on at home. When you see the price of gold quoted in the paper, it's in Troy ounces.
He also mentioned that some dealers weigh the gold in grams. There are 31.1 grams in a Troy ounce. (I'm using pennyweight in our example because that's what Rob uses in his store.)
The second step is to determine the karat weight (abbreviated “K”) of the gold. “Karat” is the term used for purity; 24K gold is 99% pure.
Commercially made jewelry will always have a karat marking on it. If there's no marking, it's a huge red flag, and most dealers won't buy it.
A dealer will still verify that the karat marking on the gold is accurate. There are several styles of test kits that dealers use; Rob noted that karat markings are usually accurate, but not always.
Some inaccurate markings are actually there to deceive you. For example, “14K Filled” or “14K HGE” (heavy gold electroplated) are both gold-plated designations. That's why they check.
Doing the Math – “Cheat Sheets” Provided!
After that, it's a matter of math. It's not especially complicated, but the terminology used by the jewelry industry can puzzle people.
Assume you have a 20-pennyweight piece of 18K gold, which means it's 75% pure gold. Fifteen is 75% of 20, so you have 15 pennyweight of 24-karat gold.
And since 20 pennyweight equals one Troy ounce, that's 0.75 oz. of 24K (pure) gold.
To make this process even more straightforward, I – with Rob's help – put together two Gold Conversion Worksheets for you. They walk you through the process step by step.
That's Great, But How Much Money Will I Get?
On average, “We Buy Gold” dealers pay about 76% of the spot price to sellers for their gold.
As a dealer, Rob loses approximately 5% when he takes the gold to the refinery. Because the refiner actually melts down the gold, its appraisal is even more accurate than Rob's. When he weighs the gold in the store, there may be steel (not gold) springs, a little filler, or even some soap scum (remember we are talking about used jewelry) on the product; that all adds to its weight.
One pennyweight is 1/20 of an ounce, so it doesn't take much to register a little more weight on Rob's scale. When the refiner melts out the actual gold, it's usually about 5% less than what he calculated.
Rob emphasized that his weight estimates never quite match what's left after the gold's been melted down. The refiner never buys the gold at spot price; when you boil it down (pun intended), his margins are normally 10-12%… certainly not exorbitant.
When I asked Rob if he had any suggestions for our readers, he said to take one item and shop it around. He suggested using a heavy item; it will give you a more accurate reading of what the jeweler is paying per Troy ounce. Go to three or four places and get quotes, and you will likely get a variety of prices.
Also, always ask the dealer for the weight and the karat of your item. They will probably quote the weight in pennyweight, knowing full well that most folks cannot convert it to Troy ounces.
Write it down so you can easily compare dealers' offers. If a couple of dealers give you the same weight, and then one is different, ask them to recheck it; don't hesitate to mention that other dealers told you something else. If the jewelry has a karat mark and the dealer tells you it's inaccurate, ask why – and get a second opinion.
Today's market for gold buyers is more competitive than you might think. To learn what the competition is offering, dealers will periodically send a secret shopper around with a gold item to their competitors to ask for a bid, should they decide they want to sell it.
Some gold buyers are very aggressive. Rob mentioned one store where the appraiser stands behind a piece of thick plastic, like at a currency exchange, and the customers slide their gold through an opening.
In one instance, a lady went into a particular store to have her jewelry appraised; the clerk slid paperwork and cash back through the slot, and refused to return her jewelry. It took fifteen minutes of escalating demands before she was finally able to speak to a manager and get her jewelry back.
If you're shopping around, trust your instincts. If it doesn't feel right, don't do it! There are plenty of reputable places that will buy your item, so do business where you feel comfortable. Shopping around can easily net you a few hundred dollars more for your item.
Remember Those Late-Night Commercials for Mail-In Gold Dealers?
I asked Rob about the firms where you mail in your gold, and they send you back the cash. Just like dealers in town, some are reputable, and some are not.
Many also charge a high “assay fee,” which lowers your total return. From a practical standpoint, it's much more difficult to comparison shop and negotiate through the mail.
Selling Directly to a Refiner
I asked Jeff Clark, the editor of BIG GOLD, if he had any suggestions. He indicated that local gold markets vary throughout the country. Some markets lack competitive buyers, so shopping around is paramount.
He also pointed out that gold refiners do not negotiate. They take the metal, melt it down, and pay you accordingly.
Dillon Gage has a $10,000 minimum order and requires a tax ID number. It pays out 99% of spot price, minus an assay fee for analyzing the gold.
Precious Metal Recovery pays 93%-96% depending on quantity, with no assay fee. If you ask, it will also provide a coupon for a portion off the shipping for larger orders.
Just like with dealers, if you go directly to a refiner, it's still important to compare prices and shop around.
On the Political Side…
As much as I can try to ignore the political side of things, the next 30 days are going to impact most all of us as investors. You have likely heard many politicians discuss the “fiscal cliff” looming on the horizon.
These are the makings of a perfect storm – and unfortunately, you're on a ship managed by a committee. Remember the old adage: “A camel is a horse designed by a committee.” It does not function well as a horse, and it's chock-full of compromises so that all committee members can save face. This is particularly true when that committee is political and spending other people's money.
Here are the factors at play. First, we have a lame-duck Congress which has just been through an election and wants to get home for Christmas. Second, the last time Congress raised the debt ceiling it was supposed to take care of things. That issue looms large. Like every other increase in the debt ceiling, it took care of things… until the next time.
Third, the Bush tax cuts are set to expire at the end of the year. If that's not addressed, there will be a huge tax increase placed on all Americans, particularly those with investment income. A tax increase of that magnitude will almost certainly have a negative effect on the economy and employment. And finally, there are massive spending cuts looming, sure to cause some unrest if they go into effect. Oh, and did I mention that Congress wants to go home for Christmas?
Our friends at Mauldin Economics are offering a free online seminar, The Post-Election Economy, next Tuesday, November 20 on all things cliff-related. I recommend signing up to watch the seminar online along with me. They've assembled an impressive panel of experts – a powerful team that gets it and can lend some real insight. Panelists include:
Mohamed El-Erian, CEO and co-CIO at trillion-dollar bond management firm PIMCO.
Barry Ritholtz, market strategist, author of Bailout Nation and editor of The Big Picture, which is among the most widely read economics blogs among market insiders.
And John Mauldin himself.
I'm looking forward to watching. As a primer on the fiscal cliff, you can't do much better.
As a general rule, I have always felt posturing your investment portfolio around current tax policy has some disadvantages. If I feel a particular investment still has a good upside, I'm often inclined to hang on to it and worry about taxes when I sell. On the other side, if you're sitting on a decent profit, wondering if you should take some profits, then why not sell some or all before the taxes go up?
What do I expect from politicians and pundits? More of the same – much on posturing and show, low on substance. Both sides immediately took the public position that they “want to work with the other side” and are “willing to compromise.” Last time I heard that it was followed by: “I won, you lost!”
Congress has not had a balanced budget in years, so what makes anyone think it will be different and they will really get together and attempt to solve our nation's fiscal problems? It will kick the can down the road as always, blame the other side for its inflexibility, and then head home for their Christmas break.
What I really find sad is this: I spent last weekend in the Florida Keys with over 100 of our SSR club friends. I did not meet one person who is opposed to paying higher taxes – with one caveat. They must be used to reduce the deficit.
Our annual debt has doubled from something like $500 billion to over a trillion dollars annually. Congress spends the money first, then screams about the deficit as justification for increasing taxes once again. Once it gets more money in the till, it immediately finds something more to spend it on.
I agree with the blurb that was going around the Internet, supposedly quoting Warren Buffett. Simply put, if Congress and the President cannot balance the budget, none of them should be eligible for re-election. Kinda the same way it works in private industry: keep losing money and you get fired.
On the Lighter Side
Well, I had my annual checkup last week. Yes, I got on the scale and got scolded. I told my doctor about an article I read on the Internet by another doctor regarding health, weight, and exercise. Here is some of what he had to say:
Q: How can I calculate my body/fat ratio?
A: Well, if you have a body and you have fat, your ratio one to one. If you have two bodies, your ratio is two to one.
Q: Is chocolate bad for me?
A: You crazy?!? HEL-LO-O!! Cocoa bean! Another vegetable! It's the best feel-good food around!
For those of you who watch what you eat, here's the final word on nutrition and health. It's a relief to know the truth after reading all of those conflicting nutritional studies.
- The Japanese eat very little fat and suffer fewer heart attacks than Americans.
- Mexicans eat a lot of fat and suffer fewer heart attacks than Americans.
- The Chinese drink very little red wine and suffer fewer heart attacks than Americans.
- The Italians drink a lot of red wine and suffer fewer heart attacks than Americans.
- The Germans drink a lot of beer and eat lots of sausages and fats and suffer fewer heart attacks than Americans.
CONCLUSION: Eat and drink what you like. Speaking English is apparently what kills you.
My doctor was born in Poland. She grinned and I think muttered something to me in Polish as she shook her head. Then she had the last laugh as she handed me a chart about weight, body fat, and longevity, and told me to go home and read it. So far today I've consumed 635 calories and it's almost dinner time, but who's counting?
Until next week…