This article was first published in the first-quarter 2014 edition of Personal Finance magazine.
I’ve just moved home and found a new resting place for the dog-eared box that contains the odd bits and pieces of jewellery I don’t wear and can’t throw away. There’s some gold and the odd gemstone, inherited or received as gifts – all “worth something”, but only in theory. Every now and then I get out the box and look through it hopefully, but so far the jewellery has not magically developed any vintage charm. So it sits, until the next move.
Yet outside my place of work, they’re clamouring for my gold and yours. The pavements and shopfronts are littered with invitations to sell your gold for instant hard cash – and there’s no doubt that I could use a little extra money to spend on the new garden. A legacy of flourishing flowers and trees instead of a box of assorted bits of gold? A no-brainer, I’d say.
So I embarked on an exploration of the risky business that is cash for gold. I took along a gold chain-link necklace bought by a relative from the well-known Johannesburg jeweller Charles Greig in the 1970s. It is 9K gold (9.7K to be precise) and weighs 45.4 grams, and current estimates of its retail value vary from R20 000 to R40 000.
Avoiding the places that hand out leaflets on the street advertising “cash/pawn/loans”, I found my dealers the conventional way: online or via (in one case) a newspaper and radio advertising campaign. There were two small Cape Town jewellery shops that buy and sell second-hand jewellery and watches; the Cape Town branch of a Johannesburg-based company that offers cash or loans “discreetly” from an office in a suburban tower block; a young man acting as an agent for a Johannesburg dealer and working part-time from a tiny room in the city; and a long-established dealer in precious metals and gemstones who occupies one high-security floor of an office block in the city centre.
The prices I was offered varied from R5 800 to R6 990, demonstrating that shopping around is important. The gold price fluctuates (more on that later), so you need to move quickly if the price is right, lest the price is lower by the time you revisit the dealer. Of course, it might be higher, but do you want to take that chance?
The experience of comparing prices calls for a thick skin, because this is a new market that has yet to develop the respectability that is usually attached to the desirable practice of recycling.
On the whole, don’t expect to be able to telephone or email dealers to compare the rates offered for gold on any given day, and don’t expect dealers to enlighten you on how they reach the prices they do. Unprepossessing premises, a careful air of anonymity, little eye contact and a take-it-or-leave-it attitude on the part of the dealers conspire to make the seller feel like a mercenary flogging the family jewels to fund a particularly bad habit.
Both here and abroad, the cash-for-gold market has taken off since the global financial crisis, riding the wave of a gold price that rose steadily between 2004 and the peak in August 2011, when it broke through the US$1 900 level for the first time.
Terry Beguinot, managing director of Point Jewellery Exchange in Cape Town, believes the high profile of cash-for-gold may be short-lived as economic conditions improve.
Beguinot says the trade has been helped to emerge from the shadows by the popularity of television reality shows such as Pawn Stars, which focused on a family-run pawn shop in Las Vegas, and Britain’s Antiques Roadshow, which made it OK to be mercenary about the family’s hidden treasures.
Beguinot’s clients come from across the social spectrum, some in need of ready cash and others decluttering, wanting to replace one style of jewellery with another – for instance, gold with silver – or anxious to get rid of gold that they consider a security risk, he says.
As Pawn Stars demonstrates, the cash-for-gold trade is closely associated with pawnbroking, which is, of course, the business of offering secured loans in exchange for goods left by borrowers. Not all cash-for-gold dealers are pawnbrokers, because not all of them offer loans or cash, but they are all second-hand dealers and must be accredited by the Second-Hand Goods and Pawn Board.
Accreditation of all second-hand goods dealers by their appropriate regulatory bodies was introduced in April 2012, when the Second-Hand Goods Act of 2009 came into force to combat a booming trade in stolen property. Among the new regulations that affect dealers in second-hand jewellery are a requirement to take the personal details of the seller, including a copy of his or her identity document, and to hold the goods for seven days before they sell them on or alter them in any way.
Better regulation will probably help to improve the image of the cash-for-gold market, and competition should see dealers positioning themselves to attract a new kind of client. There are signs of this online, where websites are beginning to provide information that is not forthcoming face-to-face about how valuations are made and are offering (in Johannesburg at least) options such as home visits by valuers and fully sponsored “gold parties” for groups of friends and neighbours, with commission paid to the hosts.
More significantly, there is at least one website that offers a long-distance service along the same lines as the mail services that dominate the markets in the United Kingdom, the United States and Australia. Whereas registered mail is perfectly adequate in those countries, The Gold Guys in Johannesburg will post you what they call a Goldpak – a padded, self-addressed envelope – and arrange for a free, secure courier service to collect the filled envelope from wherever you are, deliver it to the Johannesburg office and then return it to you if you decline their offer. Insurance to a maximum value of R5 000 is part of the free service to Johannesburg and back (if necessary), and further insurance is negotiable if you are sending goods in excess of that value.
An offer is promised within 48 hours of the Goldpak reaching the offices, and managing director Colin Wainer confirms that there is absolutely no obligation to accept the offer. If you don’t want to sell, Wainer will return the goods. If you do decide to sell, he will also return any gemstones that he cannot buy or that you might want back.
Like the other dealers, Wainer will buy inset diamonds, based on appraisal in the setting, but he says he cannot buy any other gemstones or semi-precious stones, because there is no market for them.
Clearly, this is as easy and discreet as cash-for-gold transactions get, but it does cost a little more: The Gold Guys’ margin is relatively high – between 10 percent and 15 percent, compared with, for example, the five percent quoted by Point Jewellery Exchange. I tested the Gold Guys’ service and it worked exactly as it should. The website explains the process clearly, makes contacting the company easy and provides a graph that tracks the live gold price, so you don’t have to find that for yourself.
When you take bits and pieces of jewellery to a cash-for-gold dealer, the gold becomes scrap gold, priced for refining and recycling.
Jewellery shops such as Point Jewellery Exchange, which deal in second-hand goods, do resell items that are of particularly high quality and suit their market, and they will pay more than the scrap price for them, but this is rare.
You can sell gold in any condition – broken and damaged jewellery, well-used gold dental fillings, battered medals and awards – because it is restored to its pure state in the refinery. All gold used in jewellery is alloyed with other metals for special effects: for example, to make it harder and less susceptible to tarnishing, or to change its colour.
Gold is naturally yellow, but a touch of silver, copper and zinc enhances and strengthens yellow gold; white gold contains some combination of silver, nickel, palladium, platinum and zinc; and rose gold contains copper. Even the highest grade of gold used in jewellery, 24K, is less than pure, because gold is naturally very soft and needs a minute fraction of a harder metal to make it resilient to wear and tear.
Lower grades of gold are less pure and therefore stronger and cheaper. Eighteen-carat gold is 18/24 parts gold or 75-percent pure; 14K is 14/24 parts gold or 58-percent pure; and 9K is 9/24 parts gold or 37.5-percent pure. Since 9K contains exactly half as much gold as 18K, people selling the lower grade are frequently disappointed by the prices they are quoted. In fact, according to Italian-born Riccardo Burgio, owner of Gold ’n Stones Trading in Cape Town, 9K is not regarded as gold in Italy. Anything calling itself “gold” jewellery has to contain at least 51 percent of the precious metal, so 14K is the lowest grade of gold available.
The scrap price you will get for your gold is based on the carat value, the weight of the item in grams and the gold price per gram on a given day. So you need to know what the carat value of your gold is (and if you have a variety of items, group them accordingly) and the weight in grams. If you cannot find a hallmark on the gold and you don’t have an accurate gram scale, you can ask a jeweller to give you that information, or ask the cash-for-gold dealer to demonstrate his method of establishing the quality and weight. If he declines to do so, move on.
The gold price fluctuates not just day by day, but minute by minute, and dealers base their offers on the price at the time of the calculation, or set a price for the day based on the opening price. So days, months and certainly years can make a big difference to the price you receive. Since the gold price is set in US dollars and translated into rand at the prevailing exchange rate, the strength or weakness of the rand also affects the rate in South Africa.
The unit of weight used for listing the gold price is the troy ounce, which is equal to 31.1 grams of gold. At lunchtime on July 18, 2013, for example, the spot price (which is the price at any given moment) of gold in rand was R12 612 an ounce, according to the US-based website www.goldprice.org, which provides live prices in ounces and grams in a range of currencies, including rands, throughout the day, plus analysis and comment.
On that particular day, the price had dropped 1.1 percent from the opening price by lunchtime, in keeping with a prevailing downward trend at the time. At R12 612 an ounce, it was 8.65 percent lower than it had been 30 days before, nearly 16 percent lower than six months before and 15.78 percent lower than the same day a year earlier. Yet the price was still a whopping 73.05 percent higher than the closing price on the same day five years before, thanks to a dramatic climb in the first three years of the period that took it to its highest-ever closing price in the US of US$1 889.70 an ounce in August 2011.
The weight used for jewellery is grams, with one gram of gold priced at about R405.50 on July 18, 2013 (R12 612 an ounce ÷ 31.1 grams). To calculate the price per gram of gold in a particular piece of jewellery, you divide that number by 24 and multiply by the number of carats: 9, 14, 18, and so on. For my 9K chain, that produces a price per gram of R152. Multiply that by the number of grams – in my case, 45.4 grams – and you have the scrap value of R6 904 for the gold in that chain.
Is that what you should be offered by a dealer? Unfortunately not, because the dealer has to make his cut. In March, when the top price offered for my chain was R6 990, the gold price was higher than it was at the time of writing in July – in the region of R450 a gram rather than R405, or R168 a gram of 9K gold, compared to R152 in July. Had I been paid the gold price without deductions, I would have been offered R7 627.
As Burgio explains, dealers have to cover themselves for:
* Uncertainty about the exact carat value of the gold, particularly if they do not have sophisticated equipment for analysing the gold content of the jewellery;
* If they are law-abiding second-hand dealers, the need to hold the jewellery for seven days, during which the gold price could fall;
* The need to store the gold securely for at least seven days and possibly more, because the larger the consignment of gold going to the refinery, the better the rate received by the dealer;
* An average loss of about 3.5 percent of the weight of the gold in the refining process (because there are always non-gold elements in a piece of jewellery, from the steel spring in the clasp to the fine layer of skin, grease and dirt that is deposited on the metal through use, which can weigh as much as 0.001 percent of the total); and
* The high cost of securing premises for this high-risk business.
And, of course, the small dealer needs to make a higher profit from each customer than the larger dealer does. Beguinot says his formula for valuing gold is straightforward: the gold price minus five percent. Wainer says he pays between 80 percent and 90 percent of the value of the gold, and includes 2.5 percent for metal loss in the refinery.
So would you want to sell your gold now? Perhaps not if you have time on your side and want to sell only at the very top of the market – but you’d need to be prepared for a long wait. According to well-known US precious metals dealer, commentator and author Franklin Sanders, who writes daily on various websites, including goldprice.org, the lower prices of last year are a correction that is unlikely to go much lower, but is also unlikely to turn around any time soon.
WHAT TO LOOK FOR IN A GOLD DEALER
No matter what the claim on the signboard, Riccardo Burgio of Gold ’n Stones Trading says that a small dealer cannot possibly offer the best price for your gold because there are economies of scale in the business – most notably that large consignments to the refinery yield a better price for the dealer than small ones, because the cost of refining ranges from 50c a kilogram for a large quantity of gold to R50 a kilogram for a small quantity.
So you want to do business with a dealer who is registered for value added tax (VAT), which proves that the company is established, above board and has a turnover of at least R100 000 a year. Such a dealer will require you to sign a VAT document.
Since April 2012, when the long-overdue Second-Hand Goods Act of 2009 came into force, second-hand dealers of everything from books to household goods and motor vehicles have been required to register with the South African Police Service in their area. They are also required to record the details of all the second-hand goods they buy and to hold them in reserve for seven days, for possible inspection by the police before selling them or altering them in any way – or, in the case of scrap gold, sending it to the refinery.
If a dealer is complying with the law, you will be asked to provide your identity document, so that a copy can be made, and your address.
Compliant companies are more likely to have excellent security for customers, as well as for the goods they store, whether for seven days or, in the case of pawned items, for the longer period of a loan. This is expensive, says Burgio, whose premises on the third floor of an office block cost R500 000 to secure and equip. Such an outlay would be impossible without a high turnover.
Terry Beguinot of Point Jewellery Exchange welcomes a police presence in the trade as good for the reputation of the business, and nurtures his own relationship with the local police station by attending a police forum meeting monthly and encouraging a police presence on the streets outside his premises, to ensure customers’ safety when they arrive or leave with valuable goods.
Another advantage of using the most established, experienced dealers is the accuracy of the valuation you can expect. Burgio’s laboratory-style receiving centre is equipped with a state-of-the-art R250 000 Thermo Scientific Niton XRF analyser, which uses a low level of radioactivity to assess metal alloys in seconds.
Most gold is hallmarked, but not always accurately, so my chain marked 9K is actually 9.7K. Some gold may fall short of the hallmarked number, so an absolutely accurate result is important to the dealer who shifts large quantities of metal. If the result can’t be accurate, it must be inflated to protect the dealer’s profit margin.
For the customer, the technology eliminates doubt, and reputable dealers with this much invested in their businesses are more likely to care about their reputations and provide an unambiguous daily rate per carat of gold. This is certainly not true of some of the smaller dealers, and reticence about their rate and how they arrive at it should ring alarm bells.
Less high-tech establishments use small portable gram scales and less reliable electronic gold testers, or the older method of chemical testing using powerful acids that react in various ways to gold and other metals – hence the term “acid test” for any test that is likely to be effective and conclusive. This acid test is done by scratching the surface of the gold on a black stone, so that it leaves a trace of gold dust, and testing the trace with a drop of acid appropriate to the carat value the gold is thought to be.
Colin Wainer of The Gold Guys says that most of the gold in jewellery in South Africa is 9K or 18K, with a little 14K coming from Europe, so using the acid test is relatively simple. Wainer says he can guess pretty accurately before he starts, based on his experience, and the test confirms it. However, Wainer admits he cannot tell exactly what the composition of the gold is, and his margin is designed to cover this.
Caution about who you deal with is always crucial, whatever you are buying or selling, but never more so than in this business. Acquaint yourself with the rules of the game and how they may be manipulated by some dealers, and make sure you check out premises and/or websites carefully, establish how long the company has been in business and make personal contact with the dealer.
If you are careful, you can take advantage of the cash-for-gold offering and enjoy a useful windfall.