Thursday, May 27, 2010

Beware Cash For Gold

Updated: Oct 17, 2011
Cash-for-gold can be a profitable, but risky business for Baha'is and others. However, if one has unwanted and/or broken jewelry for sale, cash-for-gold services are probably the worst alternative, perhaps paying only about 50 percent or less of gold melt weight. In contrast, a reputable refinery may pay 95 percent of gold melt weight. Indeed, most cash-for-gold outfits do not operate their own refinery and in fact send their scrap gold to such a refinery, which most owners of scrap gold can do themselves directly.
This article was prompted by two comments by "Net", a cash-for-gold spammer. I responded to the first comment in Rolling in Cash. In Market Meditation, a second comment by "Net" was deleted, not because it presented a different point of view, but because it was again misleading and spam.
CASH FOR JEWELRY
Starting a cash-for-gold business may be as simple as putting up a sign, especially if one is located on a main road. In 2008, I put up a "CASH FOR JEWELRY" sign and began buying scrap gold and silver in Dominica. Based on my own research, here is the procedure, used around the world and each and every point is readily available on the internet (please start reading by Google of "gold refining" and visit www.kitco.com):
1. Compute "Melt Weight" of Gold/Silver. The item is weighed in grams. I used a simple credit-card-sized, hand-held device sold in office supply stores to weigh letters to determine postage. On one end of a balanced arm is an alligator clip for the jewelry. The weight of the jewelry tilts the balanced arm with pointer indicating ounces on one side and grams on the other. Testing gold coins of known weight in grams, this cheap little device proved to be accurate within a small fraction of a gram, more than sufficient for the purpose.

Then, grams divided by 31.1 converts the total weight to Troy ounce.

Troy ounce is then multiplied by the purity of the gold/silver in the item. For sterling silver, this is 0.925. For gold items, the purity is measured in carets (K) with 24K being pure gold. Since both silver and gold are too soft as metals for jewelry, they are mixed with other metals to form a harder alloy which, by definition, is not pure gold or silver.

E.g., 10K, 12K and 14K items are 0.417, 0.500 and .583 gold by weight respectively. For other K values, one can divide the K by 24 to compute the purity fraction. Finally, the melt weight of an item is the total Troy ounce multiplied by the purity factor above.

2. Compute "Nominal Value". Multiply the Melt Weight and the spot metal price in USD.

The product of the Melt Weight and the Spot Price gives a nominal estimate of the underlying value of the precious metal in the item. The Spot Price changes hourly, daily, weekly, but at any time, is visible around the world by anybody (see, e.g., www.kitco.com on the internet). In the 2008-2009 period, during business hours, Fox Business News showed a good estimate of current spot gold price in the bottom/center panel of the screen. During my purchases, a TV was turned on and the seller could see with his own eyes what the current gold price was -- another indication of openness and fairness of my purchases.

Why "nominal"? Very simple. The spot metal price is for 99.9 percent pure gold/silver and in a refined form (e.g., bars) stamped by a major world-class refinery known worldwide for the accuracy of their assays for metal purity and procedures in casting and marking each bar. Well, jewelry of any kind does not meet this standard and therefore the fair market value of an item is less than the "nominal" melt weight value.

3. Multiply the Nominal Value by a Discount/Conversion factor. The Discount/Conversion number takes into account factors including the following and converts Nominal Value into a fair market price for an item.

(3a) Many refineries of scrap jewelry estimate that up to 10 percent of the presumed gold content (Melt Weight) is lost in the refining process. There are many reasons for this -- e.g., refining is not perfect; some items have springs in fasteners or other components which are not gold, but were computed in the Melt Weight; etc.

(3b) The scrap jewelry buyer has a number of significant expenses, including shipping, insurance for shipped packages, funds paid to the refinery for its work, and interest payments on working capital lost during the considerable time between purchase and final receipt of the proceeds from the refiner.

Early on, I checked with FedEx and found a package of less than two pounds weight with proper insurance would cost many hundreds of ECC dollars, just for that single step of shipment to a refiner. Regarding refining costs, the process is expensive since most use expensive chemicals in the refining to extract the gold content in a sequence of fairly complicated steps.

(3c) Regarding "buyer beware", pricing would also take into account important risk factors. Examples: Some items might be gold-plated and not pure alloy. Examination of items under a bright light with a powerful magnifier (e.g., the 10x eye-piece of a microscope) can easily reveal gold-plated items, due to wear, scratches, etc. Heavy male gold chains are often marked as 14K but in fact are gold-plated and next to worthless. A little file can be used to make a small notch in the back of an item or between links in a heavy chain, with permission of the seller. Usually, the seller wants to know what they have. Also, an unglazed piece of floor tile can be used to scratch the item. Gold leaves a bright yellow mark; brass does not. However, thickly plated items may give a false positive on this "stone" test.

A Dominican lady inadvertently taught me a great simple test for silver. She said that her silver bracelets turned black when she did the wash by hand with bleach. Bingo. A drop of chlorox will cause a black spot on silver, especially fast if in bright or sun light. This does not occur with other metals that might pass for silver on casual inspection.

Learn about all the marks jewelry makers use. A three digit number might indicate purity -- e.g., 417 indicates 10K. Some marks explicitly indicate gold-plating. Some items have no markings. General appearance and color will suggest a likely purity value after experience in handling a large variety of scrap. In those cases, I tell the seller that no marking is visible and based on appearance and origin (which country), I can make an offer based on an estimated purity factor -- my best guess. For example, a copper tint of items from certain countries suggests 9K or less.

Some items might be falsely marked, say, as 14K when in fact they were only 12K. Is the seller committing fraud in those cases and therefore, would one be a victim of fraud? In truth, most sellers do not themselves know the value of their items and if they are marked properly for purity, etc.

Also, one is a victim of fraud, a serious crime, if anybody offers for sale an item which is stolen property, if they do so knowingly.

Finally, the world price of gold and silver can change dramatically in relatively short periods of time (this is called "price volatility"). E.g., in March, 2008, gold was above $1000 USD per Troy oz. and later in 2008 dipped below $700 USD per Troy oz. So this "price risk" is very real. Indeed, for a time I was paying above $900 USD/oz. only to see a period when gold was trading in the low $700 USD/oz. range.

In short, the "buyer beware" factor summarizes a number of risks in purchase of scrap jewelry, which are intrinsic to this kind of investment. In many cases, I did not buy items offered for sale because I decided not to make any offer (e.g., the item was gold-plated) or because my offer was not accepted.

(3d) The fair market price for an item would obviously include some remuneration for my time, effort and investment funds in return for the important service -- Cash for Jewelry -- I was providing to the public.

(3e) Finally, the USD to ECC currency conversion is factored in.

SUMMARY: I was very careful and continuously read on the internet to learn all I could to minimize risk factors like those above, so I could always offer a uniform, fair price to sellers. I felt this was very important as a matter of honesty and integrity and also, thinking ahead to a point where "Cash for Jewelry" might become an established business beyond purchases by a private investor.

First, if my offered prices were "too low", I would be seen as unfair and others might copy my procedures and offer more money for items so that sellers would no longer offer items to me for sale.

Second, if my offered prices were "too high", it would mean that eventually I would simply loose all my investment funds, since I would get back from refineries less than what I paid. Applying the same idea, if competing investors in Dominica were willing to pay more than my offer, they, too, would be at risk of loosing their investment funds.

Chat with the seller while you examine an item. E.g., gold-plating might not be revealed until every link in a chain, every millimeter of an item is examined under magnification. Gold-plating can look like paint chipping off a painted wall or wearing off due to friction. Ask everything: "Where did you get this?" Some countries produce fakes more than other countries. Young men selling woman's jewelry does raise questions! "How long have you had this?" Older items were made when gold was cheaper and are less likely to be fakes.
Part of the service to the public is that the seller gets instant cash, without any waiting period.

In addition to these expenses and risk factors, one has to add in newspaper ads, shipping, possible legal expenses, risk of robbery and even personal injury, since a successful operation can quickly achieve much notoriety, especially among the wrong crowd, such as thieves. Indeed, as a cash-for-gold service, based on my own research, my "Cash for Jewelry" was paying more to the public than any competitors. It turned out that I eventually took down my sign deciding that "It can be done" does not always mean "It should be done".

Thus, unless one has excellent security (say, one foot, steel reinforced concrete walls or whatever), starting such a business as a service to the public is not suggested. My articles here discuss other ways to more safely buy gold and silver at a deep discount. For example, gold and silver still in the ground as found in selected gold and silver mining companies.

The fact that I was paying more than any competitors here in Dominica, and still could be profitable, shows how little most cash-for-gold dealers pay to the public. Some might even call it a rip off, instead of my "Cash for Jewelry" as a reputable, fair service to the public. In one actual test, another place offered only $135 for a 14K gold ring for which I would pay $240 on the same day (same spot gold price). That is, I was paying about 75 percent more. As a result, I was getting most of the scrap gold sellers and the risk factor, the attention of some unscrupulous people.

The offer price to the seller was calculated uniformly -- everybody treated equally. Often people did not accept the offer, but would return later to accept my offer after checking with other buyers. This also suggested I was offering the best prices available -- fair market prices.

To use our nominal figures above, the difference between 95 and 50 percent of melt weight leaves 45 percent minus expenses. If that sell-buy margin exceeds expenses, one has a profitable business.

DIRECT SALE TO REFINERY
One may cash out of some scrap gold by direct payment from a refinery. I mentioned Midwest Refineries, LLC based on my own research and experience with a number of shipments. Of interest to readers here, I found that MidWest will accept shipments from outside the United States (I reside in the beautiful Commonwealth of Dominica) and pay the "settlement" amount via bank wire transfer to a foreign bank.

First, among many refineries surveyed, MidWest was the only one that offered a fixed percent of melt weight (currently 95 percent), instead of a set of separate charges for melting, assay, etc. For large operators, these separate charges may turn out to be less than the flat 5 percent (100 - 95) charged by MidWest. However, MidWest does not have a minimum scrap amount. This flat charge was convenient for me, not knowing the details of the refining business and perhaps most important, suggested confidence that MidWest knew what they were doing to enable them to offer this business model.
More recently, I've been researching starting a precious metals refinery. Indeed, from materials laying around, I have built and tested (1) an oil fueled melting furnace, which can use diesel or used "black" motor oil, and (2) an electrolysis unit to purify gold ingots to .999 gold.
For a shipment, check with government authorities, if outside the U.S., if there is export fees or taxes for objects containing gold. Happily, for Dominica, there is none. Choose the biggest, most reputable over-night (or two day) carrier for shipments. I started with a small shipment of about 5 oz gold melt weight, about double that in total content weight, and a U.S. bank account for the wire transfer. All worked well, with settlement payment in less than two weeks.

To reduce risk of loss in shipment, I decided that a series of small shipments was a good idea, so all subsequent shipments were in the 5-6 oz gold melt weight range. In addition to the fairly rapid turn-around time of two weeks or less, MidWest sends by snail mail a settlement statement. If, horrors, a shipment contains non-gold items (which one may have purchased by mistake), the mailed material contains clear printouts of an image of the non-gold "discarded" items. Buying non-gold items by mistake is another risk factor, of course.

To recycle cash more efficiently, I switched to a local bank here in Dominica (a branch of the international Canadian Scotia Bank) and Midwest will wire settlement directly in a similar manner. Be sure to get from your non-U.S. bank the exact wire transfer information (SWIFT code, etc), and it may be a two-step process where a U.S. bank intermediary is involved. Just record that information exactly, so the MidWest people can just provide it to their bank and bingo, you've got cash.

To make economic sense, to use MidWest to cash out of scrap gold, probably one should have at least 1-2 oz gold melt weight. If scrap weighs 3-4 oz total, you probably have about that amount of pure gold.

SUMMARY
(1) Think carefully if you want, in effect, to risk your life by starting a cash-for-gold operation. If you pay fair prices, especially in an area without competing services, it does meet the Baha'i goal of providing a needed service with integrity.

(2) If one wants to cash out of any significant amount of scrap gold, consider direct sale to a refinery. If possible time your shipment to a refinery as gold price is rising, say, on the way to a new high. If you wait for a new high to be confirmed, so to speak, prices may be declining by the settlement date at the refinery. If you time this well, you will always be selling near gold price highs.

(3) Readers here know I support keeping gold items -- jewelry and other -- as an investment, expecting much higher gold prices down the road. So sell gold items for scrap only to raise needed cash; keep the rest. Indeed, with "Cash for jewelry", if a seller did not accept my cash offer, I would praise the person, "You made a good decision. You are doing what I am doing -- investing in physical gold. It is as if you used the money I just offered to you to buy the gold you offered for sale. By not selling, in effect, you just made a good purchase; keep that gold."
© 2010 James J Keene

5 comments:

  1. Very good tips. I will definitely keep those in mind. Cash for silver and gold has been very popular. They're very good investment.

    ReplyDelete
  2. Excellent and informative blog Dr. Keene. I am living in Western Europe and have witnessed the huge rise in the number of cash for gold outlets springing up over the past few years.

    Some of these do not even have a dedicated premises, just a table and chair with a cash for gold sign behind it in the middle of a shopping mall.
    I would love to start my own business and the information you have provided here will be as valuable as the gold itself if I do decide to take the cash for gold business route.

    I like you would only be interested in providing an honest service with fair prices and would like to be located in a dedicated shop or office, rather than just the afore mentioned table and chair in a mall scenario.

    Once again thank you, and if you ever get around to writing an update to your blog I would be very interested to read it, for example do you still trade, is it still profitable, what new things have you learned etc

    George

    ReplyDelete
  3. Thanks for sharing the information, it is realy good for those who want to buy or sell their Gold, Diamond and Jewellery in Canada. Now days it’s too easy to deal with Cash For Gold In Canada

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