With gold climbing to record levels, there seems to be as many people who want to sell their gold as well as people who want to buy your gold. The problem is that there are buyers looking to maximize their profit at your expense. When it comes to the gold trade, knowledge is the most powerful defense you have from getting a bad deal. I recently helped a friend sell old gold jewelry, pieces that my friend described as gold scrap. It was an eye opening experience.
Like a lot of people, my friend looked online and saw that the price of gold was around $1,200 per ounce and decided to sell gold items he had around the house including some pieces that belonged to his grandmother. He gathered his items and went to a local store that offered to buy his gold at a fraction of what he thought it was worth. My friend did not understand the reasons the dealer provided and came to me to explain what he heard.
How much gold do you have?
As he spread the gold trinkets on the table in front of us, he asked why the gold dealer was weighing his gold in grams. Grams are a convenient measure for calculating the weight and cost. I set my scale on the table, set it to display the weight in grams, and weighed 246.4 grams of gold. The first thing my friend ask that if he had 226.4 grams of gold (about 8.7 ounces), then why was he not offered around $10,440 (using a spot price of $1200). I told him that the pile of gold jewelry was not a full 226.4 grams of gold.
After my friend gave me a quizzical look, I picked up a larger piece of the jewelry, my loupe, and started look for the maker’s mark and the content information. After a moment, I found an “18K” mark declaring that the item was made from 18 karat gold. I explained that the piece was made from 18-karat gold meaning that it was made using an alloy of 75-percent gold and 25-percent something else. Unless the “something else” is platinum, what is the alloy is usually irrelevant. I explained that the purity of gold is measured in karats (or carats). Karats are based on a 24-point scale used to express the percentage of gold (or other precious metals) in the item. Typically, you will find that most gold jewelry is represented by one of the following purity designations:
I weighed the item and found it weighed 21.2 grams. Since it is made from 18 karat (75-percent) gold, the piece really contains 15.9 grams of gold. A conversion program told me that the piece has 0.56 ounces of gold. If the spot price is $1,200, the item has $672 worth of gold, right?
One fact that most people do not realize is that the price of gold is stated in Troy Ounces. The Troy weight system has been adapted from the Roman monetary system that was based on their standard bronze bar and 12 smaller bars that made up a fraction of that larger bar. Thus, there are 12 Troy ounces in a Troy pound. When weights and measures were standardized, the Troy ounce was standardized as 31.1034768 grams.
When we weigh items in the United States, we normally use the avoirdupois system which we sometime call the English system. Avoirdupois weight is an adaption of the British monetary system (pound, shilling, and pence) and is heavier than the Troy weight system. According to the standard, the troy pound is 5,760 grains while the avoirdupois pound is heavier at 7,000 grains.
To find out how much the gold in piece weighs in troy ounces, we divide 15.9 grams by 31.1 (rounded). The result was a weight of .5112 troy ounces. With gold worth $1,200 per troy ounce, the item actually contains $611 worth of gold.
After removing the gold coins from his pile (gold coins will be discussed in a later post), we started to identify each item by the purity. All of the items were 10, 14, or 18 karat gold in fineness. The piles were weighed and the totals calculated. When we were finished, we calculated that he really had 90.6 grams of gold. That is close to 2.91 troy ounces of gold or $3,192 with gold closing at $1,200 per troy ounce.
What is a fair price for the gold?
When you look up the spot or market price of gold, the price given is the trading price for one troy ounce of gold. This is a wholesale price that dealers use to sell to each other. When looking at prices, this is sometimes called the bid price. The bid price is the highest price someone is willing to pay for gold while the ask price is the offer price. The spot price is the last successful bid on the trading market. When negotiating with dealers, they will use the spot price from the last time the market closed. They will rarely use intra-day prices since it may be too volatile.
The first thing you will have to remember that if you are selling to a dealer, you are not selling your item at a retail price. You are not selling at a wholesale price, either. You are selling to the first person in a long processing chain where everyone is looking to make a profit from the transaction. The chain could look like:
- The dealer buys the gold from you and then sells the gold to a gold refiner.
- The gold refiner will process the item by removing adornments that are not gold. This could be anything from stones in the item to stainless steel pins. While they do not do a perfect job, there is a lot of labor involved in the process.
- The gold refiner melts the items separating the gold from everything else. The leftover metal is refined and will be used to change the purity of the final product.
- Some refiners make their own wholesale products including gold wire, gold leaf, smaller gold bars used by jewelers, or collectible gold bars and medallions. Other refiners sell their gold to manufacturers who will make the wholesale gold products or mass manufacturers, such as those who make jewelry for chain stores.
- Wholesale gold products are usually sold to distributors who will resell them in their niche markets. For example, edible gold leaf would be sold in the food industry while other gold leaf will be sold to art supplies or directly to artists.
There are costs involved in every process. Refining has one the highest costs because of the resources required to refine gold, remove the chaff, and the equipment to do this. Costs plus profit can add up to 20-percent to the price of the gold.
Every time the gold is processed and sold the business costs and profits add to the costs. By the time the physical gold is purchased it is possible that the cost of gold will be more than the spot price. That cost is justified because the item has some value added. Jewelry items add additional stones, other metals, the artist’s craftsmanship, and profit. Coin and medals also have similar value added to the final product.
Before your gold travels this road, the gold dealer looks to maximize his profit. If the dealer is working out of a hotel, they will have to earn enough to cover their rental fees and other expenses. Dealers with established storefronts may be able to offer better prices since they already have a revenue stream they can count on for expenses.
Testing the Waters
To determine what dealers consider a fair price for the gold, my friend and I tried an experiment. We went to six dealers to get their quotes and compare our findings. We went to the same dealers on different days by one trying to sell the gold in bulk by putting everything in a signal bag and bringing it to the dealers. Then we tried to sell the gold buy sorting by quality of the gold (e.g., 14 karat, 18 karat, etc.). Since we wanted their input, my friend and I agreed not to negotiate with the dealers.
One Saturday, my friend picked up the bag of gold and went to six different types of dealers. Two had storefronts, one temporarily rented the first five feet of a storefront in a local mall, and the others we met in a hotel conference rooms. On Sunday, I went to the same dealers but with the gold sorted by fineness in different envelopes. We went to dealers neither of us had any previously association. We also went to the Baltimore area to avoid D.C.-area coin dealers, most of whom I have met before.
What We Observed
With the spot price of gold closing at $1,220 on Friday afternoon, the gold was worth $3,550.20 retail. The offers were varied and interesting:
(pct of spot)
(pct of spot)
|Dealer 1 (jewelry store)||$2,300 (64.7%)||$2,500 (70.4%)|
|Dealer 2 (coin shop)||$2,500 (70.4%)||$2,700 (76.1%)|
|Dealer 3 (hotel #1)||$1,500 (42.2%)||$1,500 (42.2%)|
|Dealer 4 (hotel #2)||$1,750 (49.2%)||$1,700 (47.8%)|
|Dealer 5 (hotel #3)||$1,300 (36.6%)||$1,450 (40.8%)|
|Dealer 6 (temp mall shop)||$1,600 (45.1%)||$1,600 (45.1%)|
Although we agreed not to negotiate with the dealers, neither of us could help ourselves. My friend kept a sheet with out calculations handy to talk with the dealers and the envelopes I used to carry the separated gold had weights and estimates.
Because we went to the hotel dealers with information at hand, we think we received higher offers than others. It was common to watch the dealers pour the envelopes onto a try, weigh the items, then calculate a cost. It appears that the dealers are assuming all gold is an average of 12 karat and offer about 30-percent of the spot price.
Both the coin shop and jewelry store were more honest with their transaction. Both explained the differences in the quality of the gold and how it is calculated. While they did not take the care to weigh and calculate the costs as my friend and I did, I thought both were doing their best to give us the best price. In fact, the jewelry storeowner asked about consigning a few pieces to sell as jewelry and not as bulk gold.
The three hotel dealers were the least friendly. They had a take-it-or-leave-it attitude and did not like it when we started to question their offer. Their offers were the lowest and even if I did not prepare before going, I would not do business with them. The mall shop clerk did not know what he was doing. He was trained in the process but did not understand anything other than the process.
Interestingly, the Dealers 3 and 4 recognized the jewelry the next day when I brought them in. After I told Dealer 4 he offered $50 less than he offered my friend, he sarcastically said he should offer $100 less or call the police.
The Final Result
After our discussion with the jeweler, we went to a local estate jewelry dealer to show him the items. Rather than selling the items in bulk, the dealer purchased three pieces as jewelry for resale and the rest as scrap gold. One of the pieces had other precious stones my friend thought were not real because that is what his grandmother had said. The jeweler knew better!
While discussing our experiment, the jewelry dealer said that he has heard the story before. The hotel dealers are usually out of town buyers who try to buy as low as possible. They have higher costs because of their travel and shipping of the gold. A brick-and-mortar store with an established supply chain has a lower cost structure for moving products and transferring the gold to refiners through established business channels. Also, jewelers can opt to purchase older jewelry for resale, which will pay more money than spot gold prices.
When we walked out of the jewelry shop, my friend felt that the only way he would get a better deal was to try to sell the gold using an online auction site. We both agreed that selling to the estate jeweler was easier.
Based on our experience and the anecdotal evidence from others, do not try to sell your gold to a dealer in a hotel or one with a temporary storefront. These people are looking for the maximum profit in the least amount of time regardless of what you are trying to sell.
Coin dealers are a good middle-range buyer. But it is better to bring them coins than scrap gold.
Nothing could compare with the treatment by the jewelers, especially the one that specializes in estate jewelry. You may think you have old scrap items from grandma’s estate, but the jeweler can tell you otherwise. I would recommend taking jewelry you think is just scrap gold to an estate jewelry dealer. My friend did very well.
Whatever you decide to do, educate yourself before trying this on your own. I am convinced that we would have received lower offers if we just walked in off the street without the research.