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Latecomers’ Guide to the Gold Business

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By BILL KUNKEL

 

While the expression “gold rush” used to bring to mind the ‘49ers, Sutters Mill and striking it rich, today it might make you think of unwanted jewelry, increased traffic and, well, striking it rich.

Maybe so far you have missed out on the rush to buy gold on the part of every retailer from liquor stores to pawnshops to other check cashers and PDLs. It looked like a risky business, perhaps, and now you’re wondering if there’s any gold meat left on the bone or if you simply missed the window of opportunity for this particular profit center.

The good news is that while gold has almost tripled in value over the past half-decade, experts insist that buying the magnificent metal is still quite viable as a supplemental income source for PDLs and check cashers.

Steven Owen of EZ Gold Exchange (www.ezgoldexchange.com), a partnership program that works extensively with PDLs and check cashers, sees the market for precious metals as an ongoing growth sector.

“Gold and silver purchases at our client partner locations continue to grow,” he says. “With gold near record highs, consumers still in need of cash, and inflationary pressures increasing as a result of monetary and fiscal policies around the world, I believe that gold and silver still have considerable upside in the longer term.

In fact, gold would need to approach close to $2,200 per ounce to match gold’s previous historic high — on an inflation adjusted basis — in the 1980s.”

Owen also believes there is a large supply of consumer gold and silver in that has yet to be tapped into. The heyday of selling gold by mail has passed, he says, and consumers are more likely to sell to a local retail store. However, while the going remains good right now, speed to market is of the essence.

Instrinsic Value

Terry Hanlon, president of Dillon Gage Metals (www.dillongage.com), one of the largest dealers in precious metals in the United States, agrees with that assessment.

He notes that gold is among the rare financial assets that possesses intrinsic value as opposed to those that depend on an issuer’s promise to pay.

“Gold is less volatile than most commodities and many equity indices, and it tends to behave more like a currency that’s trending in price,” Hanlon says.

Low-volatility assets like gold represent a source of guaranteed value in long-term savings or investment portfolios. Moreover, its value is determined on the basis of supply and demand.

Although there is plenty of gold laying about above the ground in the form of coins, artifacts and jewelry, production of newly-mined gold has been on the decline for decades. This trend is expected to continue on a global basis as gold deposits are being depleted while ore grades simultaneously decline. Reports of diminishing yields from major gold suppliers such as South Africa and Russia tend to support that outlook.
Hanlon chalks this diminution of mined gold supply to several sources, noting: “Lead times in gold mining tend to be long, meaning production is relatively ‘price inelastic’ or slow to respond to higher prices.” Thus, despite the growth in gold prices, there hasn’t been an increase in gold production.

With financial crises afflicting both the United States and Europe, gold looks consistently better in comparison to currency. Given world economics, demand for the stability offered by gold is not likely to wane.

What to Look At

If you make the decision to work with a partner, Owen offers several points to consider.

“Testing and buying gold are just a small part of rolling out an entirely new business,” he says.

Make sure that your partner is providing you with a business solution, not just equipment and gold testing training. Consider what other services the partner is offering, such as ongoing support, software, operational/logistics management, quality control, marketing, sales training, insurance, regulatory assistance and the like.

“Also, make sure that your partner is using the most accurate testing tools and procedures, not those most convenient for them, because bad purchases — purchase of non-gold items — can significantly eat away at profits,” Owen says.

Quality control, store feedback loop, and value assessment — independent from a refiner — are critical.

“Finally, reviewing items and providing feedback helps minimize bad purchases and mitigates or catches employee theft, and a value estimate, independent from a refiner, helps ensure that the refiner is paying you the true value of your precious metals,” Owen says.

Choosing the Partner Route

Dylan White, who owns 30 CashMax stores in Texas and five Federal Cash Advance locations in Oklahoma, liked the package EZ Gold offers. Like many payday lenders and check cashers who dabble in gold buying, he initially tried doing it himself.

“I ruined my girlfriend’s jewelry,” he says. “And I got into trouble. That was what convinced me not to do it myself. I thought heck, if I can’t do it, I certainly can’t train other people to do it.”

White had been eyeing the business as a potential income stream when he made his first attempts at buying gold. “I had looked at the gold buying business to the point where I knew it was going to be harder than some of [my potential partners] had explained to me. When Steven [Owen] came along the November before last, that’s when I became serious about buying gold.”

White soon found himself both pleased and surprised by the way gold buying worked out for his stores.

“It’s actually been a repeat business issue for us,” he says. “Getting into the business, I thought buying gold was going to be a one-time deal. But the average customer transaction is actually 1.5, so half the people come back to sell to us again.”

But what White likes most about his partnership is that he still doesn’t know how to buy gold. “EZ Gold made it such a turnkey process that I haven’t had to take the time to sit down and learn it; I don’t have to deal with it since they’re pretty much a one-stop shop.”

White has also found ways to motivate employees with regard to buying gold. “The way we get our employees excited about it is that their gold buying gets added into the store revenue, and they get bonuses based on that,” he says.

He adds that some 85 to 90 percent of the people who come into the stores to sell gold have never taken out a loan with his company. “I thought, getting into it, that I’d just be buying gold from my regular customers and I didn’t see a lot of money in that,” White says. “But this is bringing new customers into our stores and once they get to meet us, they find out we do title loans, for example, and they’re interested. I really didn’t expect that.”

Potential Partners

Other operations also partner with retail businesses to facilitate their expansion into the purchase and sale of precious metals.

National Gold Buyers specializes in the purchase of gold and platinum jewelry and, as a FiSCA Affiliate Member, partners with many PDLs and check cashers. Their site (nationalgoldbuyers.net) contains detailed information on partnerships.

New York Gold Refiners (ny
goldrefiners.com) is another gold dealer that specializes in partnerships with retailers. It says the following elements are necessary perquisites for retailers who are considering entry into the precious metals market:
• Brick and mortar location(s) should generate a high volume of foot traffic. They emphasize that their most successful partners have been those that “already deal in financial transactions such as check cashing.”
• You must be licensed, as required by state law, and have proper equipment (an accurate scale that weighs grams, testing equipment to determine the purity of the gold being purchased as well as employee training in the use of that equipment).
• Post appropriate signage letting customers know that you’re buying gold and/or other precious metals.

Retail Gold Brokers (retailgoldbrokers.com) specializes in providing the necessary equipment (except for scales) and training in its use. Training is provided by way of webinar and teleconference formats.

Data Age Business Systems (727-582-9100), meanwhile, provides software containing the information required to get in the business.
“In general, [buying gold and precious metals] is a lucrative business to be in, and one that is ideally suited and synergistic for check cashing and payday loan companies,” Owen says.

“Check cashiers and payday loan stores already have the retail locations and the human resources. If done right, gold-buying can be quickly rolled out in those locations with limited investment, time, and resources and with minimal distraction to their core business. It provides a valuable service that is in demand from their customers.”



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