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Friday, August 29, 2008

Pawnshops Grab The Gold Ring

Credit Woes, High Prices Drive Consumers to Find New Home for Old Rolex

The U.K.'s alternative-credit industry has struck gold -- literally.

Business is booming at the country's pawnbrokers as the effect of the credit crunch forces a small but increasing number of consumers to sell their gold. And with gold trading close to record prices, the number of outright sellers of the precious metal has risen, mirroring similar trends in the U.S.

"Banks have been stricter over the last several years and have tightened lending criteria, which has created more demand for alternative forms such as pawnbroking," said Des Milligan, chief executive of the U.K. National Pawnbrokers Association. "This has been completely exacerbated by the credit crunch."

Gold has risen some $200 a troy ounce from a year ago, when the credit crunch first erupted into the British psyche. It is hovering near $840 an ounce on the world spot market. At one point in March, it hit a peak of $1,032.50 an ounce.

The precious metal always has been a popular item for mens wedding rings and at pawnbrokers. Even a piece of broken jewelry that might have little value to its owner can be pledged to the pawnbroker, who pays the item's owner a fee over a set time period. The pawnbroker collects interest on the pledge if the consumer redeems the item.

Unredeemed items at the end of the contract term are generally sent to public auction for sale, or, if that isn't successful, the pawnbroker buys them back and sells them itself. More than 97% of U.K. pawnbroker pledges are gold and diamonds.

H&T Group, which is one of two publicly traded pawnbrokers in Britain along with Albemarle & Bond Holdings, has been in business since the late 19th century. H&T's first-half profit was up 38% to £3.1 million ($5.7 million) from a year earlier. The company said this has been driven by a simple message on the marketing side: "We buy gold."

Laurent Genthialon, H&T's director of finance, said the introduction of simpler buyback contracts has boosted its business. In addition, the advent of Web sites such as eBay has made it more acceptable for people to sell secondhand items, he said.

Pawnbrokers also are roping in a new type of customer -- small-business owners who are having trouble obtaining credit from retail banks and instead opt for pawnbroker payouts to secure financing.

"Expensive gold jewelry or Rolex watches are now being used to redeem at pawnbrokers, with business people able to borrow large amounts on the back of this, perhaps £30,000 to £40,000," said Mr. Milligan. But unlike the goods pawned by consumers, these items are almost always redeemed eventually, he said.

By: Andrea Hotter
Wall Street Journal; August 28, 2008