A look inside the gold price mechanism

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Revelations that London banks manipulated the LIBOR interest rate — misbehavior for which they have been fined billions by regulators — has prompted a closer look at the ways other financial markets are manipulated, including gold, one of the biggest — $20 trillion (trillion with a T) according to Bloomberg News.

It appears that the term “London fix” may be as problematic for gold as for LIBOR (which is a base interest rate that has spillover effects on rates you and I pay, for adjustable rate mortgages or credit cards, and much else).

Should it prove that the five banks — at least two of them already proven to be corrupt — that fix the London rate have also been gaming the gold price, that might not have a great deal of impact on our Maui pawn shop. We buy and sell gold based on the New York spot price, which is updated every 15 seconds during the business day; but we do not change our benchmark so often. Besides, our prices are flexible within a few dollars or so (out of, at this writing 1,245 dollars), so we are not playing in the same league as the arbitrageurs who may (or may not, who knows yet?) be fiddling the gold market.

As the story explains, the mischief seems to come in very short-term (minutes long) bets on futures prices. Pawn shops deal in physical gold, whose value is necessarily somewhat decoupled from the vagaries of the futures market. Nevertheless, suspicions that crooks are loose in the marketplace cannot be welcome. Crooks in banks? Who knew?

“Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former economist at Barclays. “That is the great flaw of the London gold-fixing.”

Stay tuned. Kamaaina Loan blog will be keeping an eye on this.

 

 

 

 

Gold gets interesting

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As readers know, the daily and weekly gyrations in the price of gold (and silver) don’t concern our Maui pawn shop too much. We make our money off commissions, so when gold goes up $25 or down $30, it doesn’t affect us that much.

Where will it go?

Where will it go?

 

But when gold gets near a top or a bottom, then we start paying attention. Today, the Dow-Jones average topped 16,000 for the first time and the S&P topped 1,800 for the first time. As often happens when stocks are up, gold is down, by $17 to about $1,273. That’s near the lowest for the 21st century.

Will it go lower? We have no idea. But here’s a good roundup of differing views from Bloomberg News. Some of the big noises in the Republican Party, like Rep. Paul Ryan, are gold bugs and, the story says, trying to get the Federal Reserve to tie the valuation of the dollar to the commodity price of gold.

Not everybody thinks that is a good idea:

“It’s a stupid idea,” Joseph Gagnon, a former Fed economist, said in an interview. “It’s pretty clear the Fed thinks so, too, since they do the opposite. They go out of their way to exclude commodities.”

It looked different, at least to vice presidential candidate Ryan, in 2010. His prophecy didn’t turn out too well:

To Representative Paul Ryan of Wisconsin, record gold prices in 2010 heralded “a lower standard of living for many Americans.” Representative Ted Poe of Texas foresaw “a blast of inflation that will crush the middle class” adding: “Where gold prices go, other prices follow.” Fellow Texas Representative Ron Paul, a perennial critic of the Federal Reserve, warned that “confidence is being lost in the entire fiat monetary system,” a reference to money created by central banks.

But the price of gold didn’t keep going up, up, up. Instead, it has dropped by a third.

The gold bugs may yet turn out to be right, but not so far.

Big surf

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Yesterday, I drove out to Hookipa to look at the surf. From Baldwin Avenue around the old men’s home, you could see the whole coast was closed out, with surf crashing over the outer reef.

The picture doesn’t show it very well — iPhone cameras weren’t made for that.

It was the heaviest surf I’ve seen in several years, though nowhere near as big as I’ve seen it a long time ago. The big sets came intermittently, and the crests were far apart. At its biggest, Hookipa surf comes in tightly bunched and crashes hard enough to make the ground shake.

Wednesday was nowhere close to that. But it did come quite early in the season.

There’s been some blather about global warming in connection with the typhoon in the Philippines, part of the promised more and bigger storms. You sure can’t prove that by Maui (or by measuring Accumulated Storm Energy worldwide, either).

It rained hard at Kahului Airport Sunday; set a record that doubled the old record for a short period. It wasn’t raining hard Upcountry, and I didn’t realize there was a downpour Downcountry or I’d have rushed to see whether the intersection at Hana Highway and Dairy Road flooded.

That intersection used to flood two or three or more times a year, and become impassable every other year or so, a serious matter since that’s how you get to the airport from the tourist areas. One time in the late ’80s, I forget which year, there was a three-day storm that closed off that intersection for days, cutting off East Maui from West and South Maui.

The alternative way along Hansen Road flooded, too, and that was closed. I reported that East Maui was completely cut off, although it is possible that in a truck you could have gotten down Amala Place, through the airport and out along Haleakala Highway to Hana Highway. I didn’t try it, and it wouldn’t have made a difference in the big picture anyway.

My story in The Maui News made a big deal of the fact that if the state closed Haleakala Highway north of Hana Highway, which it was proposing to do as part of the runway extension, flooding at Dairy and Hansen would truly cut off East Maui any time there was a moderate rainstorm. (Ed Tanji, then reporting for the Advertiser, thought I overreacted; he believed Hansen Road had been closed by a rookie cop who didn’t understand the situation; but he was kind enough not to say a malihini reporter had misunderstood, too.)

Gov. John Waihee, trying to soothe the furor over the runway and flush with $500 million from Duty Free Shoppers that could be spent only on airport projects, ordered Haleakala Highway rebuilt around the end of the runway, which never was extended. Nowadays, if you wonder why the road wanders around in the fields and requires you to make three mysterious dogleg turns, it’s because John Waihee wanted to keep me happy.

It cost $1,000,000, the most anybody has ever spent to make me happy.

Later, as part of the development of Kmart and other big box stores, the intersection of Dairy and Hana was rebuilt. (It was raised, so that the cross-streets flood now in a heavy dew.)

The point (and I do have one, though it has taken a while to get to it) is that after the intersection was raised, it stopped raining. Whenever I saw Warren Unemori, who designed the road, I’d ask him if he was sure it would handle a big storm, and he always smiled and said he was sure it would. But for more than 20 years, until Sunday, it was never tested.

So, whenever the alarmists say we are going to have to weather more and bigger storms, you can’t prove it by me.

The Dairy-Hana intersection stayed open, so Warren was right.

One place pawnshops get respect

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Pawnbrokers — including Kamaaina Loan blog — often lament that the image of pawnshops with the public is generally low. But there’s one place where we rank high. In fact, as far as we know, the highly-regarded Fender company is the only business that uses “pawnshop” as part of its branding.

Fender has just announced an addition to its fairly new Pawn Shop Special series, a small amp called the Ramparte that

looks the part of the perfect pawnshop prize.

Who knows how many now-famous musicians would never have been heard of if they hadn’t scored cheap used amps and guitars and mixing boards from a pawn shop when they were starting out poor, hungry and working gigs for free? Many, we think.

Tools 086

Maui, whose tourist business supports a high concentration of talented players, is awash with quality instruments (and some of middling goodness), and there are always a few in our retail store at 98 North Market Street.

There are even more in the warehouse, but most of those you’ll never see in the store. They go back to the owners, who have pawned them. Not because they needed money but because they are off on a tour or for a recording date — as the pros so often are — and the akamai ones have figured out that it’s a whole lot cheaper and safer to pawn their instruments with us than to put them in storage.

Our bonded and insured warehouse is climate-c0ntrolled.

The musicians may have come on this cool trick on their own, or they may have learned it from Jerry Clower’s Uncle Versie Ledbetter.

Luxury asset lending

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One thing Kamaaina Loan blog hasn’t covered much is how pawnbrokers do business with small businesses.  Usually, the actual transaction is with an individual, as with the vast majority of pawn loans, but “luxury asset lending” differs because it is a loan for much more money than a typical pawn loan, and it is taken out to tide an operating business over a financial hump — like making a payroll, which is much different from asking for a few hundred dollars to cover an emergency car repair.

Our comfortable Private Transaction Room

Our comfortable Private Transaction Room

This sort of loan has been a part of the pawnbroking business right along, but only with the increased attention paid to pawn (thanks to cable TV) has it acquired a name — personal asset lending, luxury asset lending or collateral-based lending.

None of the terms is especially well chosen, but that’s what the financial press has decided to go with.

Collateral-based lending, also called personal asset, luxury asset lending, is small but fast-growing, part of the shadow-lending sector that has emerged since traditional credit dissipated after the financial crisis.

The Wall Street Journal estimates it could soon grow to a multibillion-dollar segment, which sounds big but would be trivial compared to the big sources of short-term business money, like commercial paper.

Here’s a typical example of how it works: Let’s say a small general contractor has to make payroll but, for some reason, a progress payment on a project hasn’t come in on time. He needs several thousand or maybe a few tens of thousands of dollars, and he needs it fast.

Banks and other lenders cannot react that fast. Credit cards might work  but only if the borrower has a lot left on his credit lines.

Who can give a businessman $25,000 in cash in 15 minutes? A pawnbroker can. If the businessman has a gold Rolex, or something similar. A safe deposit box of gold coins will do. Even a stamp collection, although it would likely take more than 15 minutes to value that.

Now, let’s say our general contractor also does not want to be seen handing his Rolex across the pawn counter. People might talk. At Kamaaina Loan, we have him covered.

Call 242-5555, explain you want to do a “luxury asset loan” and we’ll open our Private Transaction Room, which is accessed via a private entrance well away from the pawn entrance. We’ll even send a limousine to bring you and your Rolex (diamond tennis bracelet, Krugerrands etc.) to us.

 

“Small business owners are not willing to extend themselves further into debt without more assurances of an economic recovery and stability,” says Paul Aitken, CEO of personal asset-based lender Borro Inc., in a press release, noting that small business borrowing has continued to decline. “The macroeconomic picture shows indications that the recovery should be on its way, but small business owners don’t share that same sentiment. “The consequence of accumulating too much debt has become more than people are willing to accept,” he adds. “Personal asset lending continues to be a favorable option as it avoids the potential pitfall of damaging credit scores.”

As with all pawn loans, we don’t care what your credit score is. Your Rolex is good enough for us.

 

 

Who is a pawnbroker?

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As this editorial from the Wheeling Intelligencer demonstrates, pawnshops and other dealers in secondhand goods sometimes have to surmount poorly conceived local regulations.

In most places, including Hawaii, there are separate legal codes for pawnbrokers (whose primary business is lending but who buy and sell used merchandise) and pure secondhand dealers, who do not make loans. In a few places, like Florida, there are more than two sets of regulations, as secondhand dealers are further subdivided.

Not in Moundsville, West Virginia, though.

Pierson took his concerns about the ordinance to council last month. He explained his store is not a pawn shop. He merely buys and resells merchandise. He does not provide loans with items brought into the store held as collateral. Most reasonable people would agree Pierson is not operating a pawn shop.

But city officials have said Pierson is required to fill out pawn cards for any valuable items he buys, then hold the merchandise for 10 days before selling it. Police Chief Tom Mitchell explained requiring documentation and a delay in sale can help his department track stolen goods.

This appears to be nothing more than 1) poorly drafted legislation in a hick town; and 2) casual perhaps biased enforcement.

One of the continuing beefs at our Maui pawn shop is that enforcement of secondhand dealer laws is spotty to non-existent. Kamaaina Loan is registered as both a pawn shop and a secondhand dealer.

Following the two sets of rules is not extra burdensome. The same sorts of recordkeeping are required for both kinds of deals, and the difference is the holding period.

For purchases, our business is required to hold merchandise for 15 days before reselling. Pawned items have to be held 60 days, and if not redeemed by the borrower by then, can be sold.

And since Kamaaina Loan, as a pawn shop, makes daily electronic reports to police, the authorities can monitor both kinds of transactions at the same time. Secondhand dealers are regulated in theory but in practice with swap meets, Internet classified lists and other avenues for disposing of used goods, secondhand dealing is hardly supervised at all.

 

Canonization for Big Rich

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When correspondent Emily Bott of Maui No Ka Oi magazine asked if she could do a profile of Big Rich for the November-December issue, Rich had no idea he’d be portrayed as the “St. Nick of Market Street.”

talk-story-pawn-shop-richard-dan

Emily riffed off the fact that Saint Nicholas is the patron of pawnbrokers (and sailors). She didn’t tell  Big Rich, however, about St. Nick’s other characteristic: Throwing bags of gold through the windows of poor fathers so they could provide doweries for their marriageable daughters.

Rich likes being St. Nick but he is not planning on throwing bags of gold through anybody’s window.

Nationally, 80 percent of pawnshop clientele reclaim their collateral on time. Dan’s average is 93 percent. “People pawn items they have an attachment to. They prefer to redeem them.” Dan makes it easy to do so. A wall filled with testimonials backs up his claim that “I hear ‘God bless you’ all the time.”

(Photo by Sue Hudelson, courtesy of Maui No Ka Oi magazine)

Who do you trust?

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One cool thing about being in the pawn business is that we can (usually) make money on gold whether its price is up or down. That’s because we both buy and sell and depend on the commission for profit, not the fluctuation.

That is not the case with most individuals. Probably most buy gold as jewelry, so the variation in price doesn’t matter much to them anyway. But for those who buy gold as an investment, it certainly makes a difference when to hold ’em and when to fold ’em.

For example, right now the price of an ounce of gold is about $1,314. Goldman Sachs thinks the price will be down close to $1,000 by the end of next year; but there’s an alternative opinion. Bloomberg News describes the views of  Peter Schiff, a well-known gold bug. He thinks gold is going to $2,000, and soon.

So, take your pick, $1,000 or $2,000. The story quotes Ben Bernanke:

“Nobody really understands gold prices and I don’t pretend to really understand them either.”

Neither do we.

We will buy your gold or silver jewelry, coins, ingots, dust any time, for the daily New York spot, minus a small commission. Or we will sell you jewelry, coins or ingots (sorry, gold dust not usually in stock), for the New York spot plus a small commission.

We will beat any other written offer you can find on Maui, too.

A reliable form of Maui gold

A reliable form of Maui gold

 

Two colorful pawn shops

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These two pawn shops, one in Maine and one in Florida, make our little Maui pawn shop seem kind of — how to say? — drab?

Pawn shop in Maine

Pawn shop in Maine

 

The photo of the Florida shop does not show quite how colorful the shop is. Even the palm trees are painted green, yellow and blue.

 

Even if we wanted to paint our Wailuku pawn shop this way, we don’t have the wall space to do it.

Pawn shop in Florida

Pawn shop in Florida

Too little to borrow

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Kamaaina Loan blog has linked to many newspaper or television stories about the new status of pawning. Here is an unusually detailed report in the Chattanooga Times Free Press.

Business reporter Ellis Smith did something we haven’t seen before. Although we have often noted that banks won’t lend you a hundred bucks — something our Maui pawn shop will be happy to do — Smith made the effort to ask his local bankers just how small a loan they would consider:

First Tennessee, the largest bank by deposits in Chattanooga, doesn’t lend less than $2,500, “and we don’t make money until we get way over that,” said Keith Sanford, market president for the bank. “Even at that level, we try to steer them toward a credit card.”

SunTrust has an option on its website for unsecured loans, but it also requires a credit check, and the minimum loan amount is $3,000.

Of course, Kamaaina Loan doesn’t make unsecured loans either. We need something to pawn — gold ring, power tool, guitar. Something.

But we don’t care what your credit rating is, or even if you have a credit rating.

Guns in a Chattanooga pawn shop

Guns in a Chattanooga pawn shop

 

Other differences between our Maui pawn shop and the pawnbrokers in Tennessee: By law, in Hawaii we cannot lend on autos.  Pawnshops can lend on titles in Tennessee. We don’t do firearms. As far as we know, only one pawnshop in Hawaii has the federal firearms license required to do  pawn loan.

It’s on Oahu and is primarily a gun shop that makes loans as an additional business service.