Hold It or Fold It? What You Need to Know about Gold
MONEY MATTERS / By Dennis Miller
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 American Gold Eagle Coins. If things get really tough, he wouldn’t want to have to barter jewelry with no easily agreed-upon value. Gold jewelry also can make a wonderful gift, when done appropriately, for your children and grandchildren. I’ve recently explained how and why to do this an article in Miller’s Money Weekly.
Phil could probably sell his gold jewelry at any number of places in his area, but how would he know if he was getting a fair price? I didn’t know, either, but I knew a friend who would know.
So 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; the price swings of gold 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, where his shop is located, even if Ron 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 aTroy ounce.
I asked Rob, “If I weighed a gold necklace on my wife’s Weight Watcher’s scale and it weighed one ounce, that’s 20 pennyweight on your scale, right?”
“Not exactly,” he replied.
A Troy ounce is not the same unit of measure as the ounce on a postal scale or on the scale you weigh yourself at home. When you see the price of gold quoted in advertisements, it’s inTroyounces.
Rob 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 (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 dealers check karat.
Doing the Math — “Cheat Sheets” Provided!
After that, it’s a matter of math. Figuring out the weight and purity of gold is 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.
Since 20 pennyweight equals one Troy ounce, that’s 0.75 oz. of 24K (pure) gold.
To make this process even more straightforward, with Rob’s help I put together two Gold Conversion Worksheets for you. These charts 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 sellers about 76% of the spot price for their gold.
When Rob weighs the gold in the store, there may be steel (not gold) springs, a little filler, or even some soap scum (remember, we’re 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, its appraisal is even more accurate than Rob’s. In fact, it’s usually about 5% less than what the dealer calculated. So, as a dealer, Rob loses approximately 5% of his estimated value when he takes the gold to the refinery.
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.
He also suggested asking 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 toTroyounces.
Write down the weight each dealer gives you so you can easily compare dealers’ offers. If a couple of dealers give you the same weight but one is different, ask that dealer 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 to their competitors with a gold item asking 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, and the clerk slid paperwork and cash back through the slot and refused to return her jewelry. It took 15 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 back cash to you. Just like dealers in town, some are reputable and some are not.
Many of these mail-in dealers also charge a high assay fee, which lowers your total return. From a practical standpoint, it’s much more difficult to comparison shop and to negotiate through the mail.
Selling Directly to a Refiner
I asked Jeff Clark, the editor of BIG GOLD, if he had any suggestions for selling directly to a refiner rather than to a dealer. 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.
Jeff pointed me toward two refiners, Dillon Gage and Precious Metal Recovery. I phoned them both.
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.
Dennis Miller is the author of the book Retirement Reboot and the blog Miller’s Money Weekly, and the editor of the newsletter Money Forever.