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Following the Yellow Brick Road

Continuing our series “Gold Fever" GemMail presents the story of Michael Shields who has turned from dealing in second-hand diamonds, jewelry and watches to dealing primarily in gold—and is doing ten times the business since the switch.

By Michael Shields, Diamond & Gold Buyer Buyer (410-913-0300; michael@adamasinc.biz)

Photo courtesy of Photo du Jour.

Photo by Tricia Gdowik

I’d like to be able to claim that my foray into the world of gold buying is attributable to some highly developed knowledge of markets and keen sense of timing--but it’s not. It’s attributable to preparedness, opportunity and dumb luck.

I first got the feeling that gold was going to soar about two years ago when credit started tightening up. Around that time I bought a house in North Carolina, but when it came time to move, my wife got cold feet. So now I was flushing $3300 a month down the drain for a house that I’d never live in. I hated writing out a mortgage payment check each month, and wanted to do something that’d make me an extra few thousand a month to help offset the mortgage. That’s when I decided to ‘beef up’ my then anemic gold business. I figured that with all of the people maxed out on their credit cards and the skyrocketing price of gas, people would be selling gold like crazy. And sell they have.

From Carats to Karats

At the time, I was primarily a diamond dealer--something I had been since 1994--buying mostly from pawn shops and a few jewelry stores. I was able to average 10%-12% profit on a gross of about $1.8 -$2 million a year. Since I had no overhead, and I am not a greedy guy, this was a decent living.

Once I began to focus on gold, the gross and net numbers changed dramatically.

Last year’s gross was somewhere north of $12 million, and this year I’m on track to grossing $20 million plus--about ten times 2007’s sales. Funny thing about gold is this: while I’m doing ten times the business, I’m only making 1 to 2%. Why?

Where I could make a 10-12% margin on the diamonds, I get only .6 – 2.2 % on the metals (and that includes silver and platinum). Luckily, through word of mouth from happy customers, my business has grown exponentially. Now I’m at the point that I’m doing such large quantities that the narrow buy-sell spread on gold still adds up to a decent living.

Photo courtesy of Goldpawnbrokers.com.

When 96% Adds Up to More Than 98%

When I first made the transition from mainly diamonds, jewelry, and watches to primarily gold, the shop owners with whom I already dealt and had a relationship would always ask me why they should sell their gold to me instead of directly to a refiner. Well, I have been around long enough to hear the myriad of complaints that various pawnbrokers and store owners had about some refiners.

I’d hear stories that ran a gruesome gamut from slow pay and receiving below spot to getting shorted on returns and outright thievery. The gripes against refiners were numerous. Anyway, I knew how people wanted to be treated, and how they didn’t, and I proceeded accordingly. It never takes me long to show a shop owner how they’re NOT getting the 98% that they think they’re getting. To the contrary, it always adds up to less than the percentage I pay. All that’s needed is an analysis of their latest statement from the refiner and a comparison with what I would have paid for the same amount of gold.

By being ready to buy all the gold they have to sell and paying fair and fast, I now have a base of about 60-80 “regulars” who use me between thrice weekly to once a quarter, with more calling me nearly everyday. It’s great, but since I’m working 80 plus hours a week, I’m not sure how many more clients I can handle.

Here a Gold Buyer, There a Gold Buyer, Everywhere a Gold Buyer

Photo courtesy of Kudzu.com.

Jewelers everywhere are now hanging signs in their windows to tell the public that they are buying gold. I expect to see this trend continue for the foreseeable future, and intensify if the economy doesn’t improve soon.

There are many out there who had the foresight to follow the yellow (gold) brick road a while ago, and have reaped the rewards. Yet I am still amazed when I talk to a store owner who tells me that they’re not buying gold. The landscape of the industry has changed dramatically, and I fear that those who cannot or will not adapt are in very serious, very real danger of falling victim to the current economy. If nothing else, buying and selling gold can keep the lights on, the rent paid and provide disposable income you might not otherwise have.

But don’t expect to make a killing. As more and more jewelers jump on the gold bandwagon, increased competition will force buyers to pay more per ounce and work on thinner margins. But for now the business and its margins are great.

Photo courtesy of WishTV Indianapolis.

Margins

I don’t mean this article to serve as a ‘how-to-make-big-profits-in-gold' manual. I’m not here to dispense advice. Quite frankly, I never ask what the people from whom I am buying have paid for their gold. It’s none of my business. What I’ll tell you is this: from talking to dealers willing to volunteer information, as well as those who keep current on their competition, I typically hear pay-out numbers that range from about a third to two-thirds of scrap value. That’s a lot more than jewelers typically make on their sales of certificate diamonds.

As an intermediary between pawn shops and refiners, I have to work on minuscule margins. There really isn’t room for big profits as a go-between.

Hey, I’m not complaining. I like what I do and I feel good about how I conduct my business. As a Chinese aphorism puts it, “A little upon a little upon a little soon becomes a lot.” It’s an idea that I feel some jewelers, specifically those not buying ‘off the street’, ought to consider.

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