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In our earlier article on pawnbrokers, we touched on the impact of casinos on the pawnbroking business. Today we would explore one of the factors with a significant profitability impact on the pawnbroking industry!

When you first step foot into a pawnshop, what would you see?

Right! Gold, glorious gold everywhere!

In terms of price, gold has had a roller coaster few years, declining 28% in price in just 2013! It has fell from the heights of close to US$2,000/oz to the US$1,300/oz in just a 3 year period!

The impacts of gold prices on jewellery retailers were well documented in our earlier article and today we would explore the impact of gold prices on pawnbrokers.

With the bulk of revenue derived from the retail and trading of pre-owned jewellery and gold, the fluctuations in gold prices would have a significant impact on a pawnshop’s revenue. A case in point would be ValueMax Group Ltd (SGX:T61), with the above segment making up 94.20% of FY2013 Revenue! With close to a 28% fall in the gold prices in FY2013, ValueMax’s revenue correspondingly declined by 30.6%. This S$156mil drop in revenue proved the relationship between revenue and gold prices to be more than a mere coincidence.

Pawnbroker scenarios

Best: Steady appreciation of gold prices

Base: Low volatility in gold prices

Worst: Sharp drop in gold prices over a period of a year

Why is the best case scenario a steady appreciation of gold prices?

This was attributed to the fact that higher gold prices would increase the value of the collateral pawners could pledge to the pawnshops. And in the event that after the contracted time, in the ideal scenario where gold prices appreciate, the pawnbroker would be able to sell the unredeemed gold at a higher price at auctions and the second hand market!

This could lead to a higher margin for pawnbrokers!

But on the flipside, if prices plunge (28% drop in a year would be considered a plunge by many), pawnbrokers could be forced to sell their gold items at lower prices, eating into their margins and in the worst case potentially resulting in losses!

In the first place, why do people transact at pawnbrokers?

As mentioned earlier, one reason would be conventional credit ratings not applying to the pawner as it’s essentially a collateralised loan. Some term it as a form of micro-financing; as long as you can provide the collateral, liquidity would generally be available. 

What people might not be aware of would be the terms of the loan. According to an article by The Edge Singapore, pawnshops offer a maximum of 6 months for the loan, charging a maximum interest of 1.5% for each month. The absence of a required credit rating coupled with the above conditions might shed some light on the demand for such short term loans.

Value In Action

We would have to dig deeper to find out on the potential growth and value of the pawnbroking industry, a trade allegedly that dates back over 3,000 years in China!

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.

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